October 4, 2013

Don't borrow from retirement account to pay for kid's college

A study of 180,000 Fidelity 401(k) account holders revealed that repeat borrowers are middle-aged parents raiding their retirement accounts to pay their children's college expenses. “Once people hit their 40s, we see a big spike in the number of loans taken out in the third quarter” – when college tuition bills are due, says Jeanne Thompson, vice president for market insights at Fidelity. According to Fidelity, nearly 65% of serial borrowers are between ages 40 and 60. Families with children are more likely to dip into their 401(k) accounts multiple times. While 13% of the childless couples in Fidelity’s sample have more than one loan outstanding, the same is true of 18% of parents with one child, 22% with two children, 21% with three children, 35% with four children, and 39% with five or more kids. Moreover, serial borrowing peaks when the oldest child is between 18 and 23—or the age associated with college attendance" according to writer Anne Tergesen. As Tergensen explains, "while 401(k) loans are a cheap and easy source of credit compared with credit cards and personal loans, Fidelity calculates that those with multiple loans can do serious damage to their nest eggs over the long-run, even if they repay the loans. Someone who earns $40,000 and receives 4% annual raises but takes five loans will amass $298,300 in their 401(k) account after 40 years, calculates Fidelity, assuming a 7% annual rate of return and a 6% employee contribution rate. That’s 27% less than the $405,740 the same person would have had with no loans." So think three times before raiding your retirement to pay college tuition. Read more at: http://blogs.marketwatch.com/encore/2013/10/01/why-your-kids-are-bad-for-your-401k/

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