If you want to help pay for your child or grandchild’s education, do you know the answer to this question:
Can I afford to give without putting my own retirement at risk?
Helping family members with education expenses can be an impactful way to support the next generation, but the way you provide that support is important. Before making a large payment, understand how that decision fits into your overall financial plan.
In this quick video, T. Ray Baker walks through three important questions to consider before paying for college or other education expenses. He explains why the first step is testing whether your retirement plan can support the gift, how choosing the right source of funds can affect your long-term financial picture, and why having a clear conversation with your family is a vital part of the process.
He also discusses how education payments and large withdrawals can impact taxes, Social Security, Medicare premiums, and future tax-planning opportunities. A decision that feels generous today can have lasting effects, so understanding the bigger picture can help you make a more informed choice.
We hope this gives you a helpful starting point if you’re thinking about helping a child or grandchild with education costs while balancing your own retirement objectives. If you have questions about college planning, retirement income, or how a financial decision may affect your broader plan, reach out to your advisor or call our office at 972-502-9340. Watch now!
Frequently Asked Questions
Can I help pay for my child’s or grandchild’s college without hurting my retirement?
Yes, but it’s important to make sure your retirement plan remains on track before committing to education expenses. While there are loans and scholarships available for college, there are no loans available for retirement. The Baker Team at Parkway Wealth Management Group can help you evaluate whether paying for college fits comfortably within your long-term retirement income plan so you can support your family without compromising your own financial future.
What’s the best way to pay for college without creating unnecessary taxes?
The answer depends on where the money comes from. Withdrawing funds from a traditional IRA or 401(k) could increase your taxable income, affect Social Security taxation, or even raise your Medicare premiums. Depending on your situation, using cash, taxable investment accounts, a 529 plan, or paying tuition directly to the school may be more tax-efficient. Coordinating your education gifting strategy with your overall financial plan can help reduce unintended tax consequences.
Should grandparents use a 529 plan or give money directly for college?
Both strategies can work, but each comes with different tax, financial aid, and estate planning considerations. A 529 plan for grandparents offers tax-advantaged growth and flexibility, while paying tuition directly to an educational institution may have different gift tax implications. The Baker Team at Parkway Wealth Management Group can help you compare your options and determine the most effective way to help children or grandchildren with college while supporting your broader family wealth transfer goals.
Transcript
Every August, some version of the same question comes up, usually after a tuition bill arrives or a grandchild is starting to look at schools and someone in the family wants to help. Can I do this and still be okay for retirement? For many families, the answer may be yes. It’s not just about how much you do, but it’s also about the way you do it.
Let me walk through three things to sort out before the money actually moves. Start with the part of this that’s non-negotiable.
There is financing available for school. There are loans, grants, scholarships, work, a longer timeline. For practical purposes, there’s no financing available for your own retirement. Nobody is going to lend you an income at 85.
That’s not necessarily a reason to say no; it’s a reason to sequence it correctly. You want to offer help from what your plan can spare, not from what your plan is counting on.
The practical version of this is simple. Before you commit, run your plan with the gift already in it and see whether your income still holds up through the years you need it, including later years that people tend to underestimate. If it holds, you have your answer.
If it doesn’t hold, you have not lost the ability to help, you just learned it needs to look different.
Whether that is a smaller number, a longer schedule, or a different form of support, the same dollar amount can cost you very different amounts depending on where you take it from.
Pull a large sum out of a tax-deferred account, such as a traditional IRA or an old 401(k), and every dollar of it lands on your tax return as income that year. A big enough withdrawal can push you into a higher bracket. It can change how much of your security is taxable.
It could raise your Medicare premiums, and that adjustment generally works as a look-back for a couple years, so the impact shows up well after the check is cleared. How much of this lands on you depends on your income, your filing status, and of course the rest of your tax picture. Take the same amount from cash or from a taxable account where the holdings have a high cost basis and the tax picture can look completely different.
Timing is part of this too. Writing one large check in a single calendar year and spreading the same support across several years may not be the same transaction from a tax standpoint. And if you are in the years right around retirement, those are also the most flexible years for planning.
A large withdrawal can eliminate valuable tax-planning opportunities. None of this is a reason to hesitate, it’s just a reason to decide the source on purpose rather than by default.
The third piece is one families tend to skip, and it causes more friction than the money does.
Talk to the parents first. They may already have a plan in place, and there are situations where the timing and ownership of an education account can interact with financial aid.
Those rules have shifted in recent years, so it’s smart to confirm with a qualified professional how they apply now rather than relying on what was true a few years back. Then get specific for your own family. Is this a gift or is it a loan? Is it one year or will it be for all four? Is it this grandchild or is it for every grandchild, including the ones that are six-year-olds right now and may be looking at schools long after this decision has set a precedent?
Families rarely regret being generous. They regret being unclear. There is also more than one way to do it.
A dedicated education account, paying the school directly, or a straightforward gift each carry different consequences for taxes, for control, and for what happens if plans change. Paying tuition directly to the institution, for example, may be treated differently from handing over the same money as a gift. Before you choose, consider walking it through with a qualified tax professional.
So three things: 1) Test your own plan with the gift in it before you commit. 2) Decide deliberately which account the money comes from, and 3) have the family conversation before the first payment, not after the third one.
Wanting to help with education is one of the better problems to have. It’s worth knowing where you stand rather than guessing. If you’re working through this for your own family, we would be glad to take a look at it with you.
We are The Baker Team at Parkway Wealth Management Group. Thanks for watching.
