It’s that time of year again. Summer is coming to an end (already!) and college classes are starting. You know what that means for your employees that are parents – time to start writing those checks!
Unfortunately, sometimes those checks have nowhere else to come from but their retirement accounts. If you handle the day to day administration of your retirement plan, do you notice an uptick in hardship withdrawal and loan requests around this time of year? If so, these looming college costs could be the culprit. According to the College Board, the average tuition this year is almost $8,000 for an in-state public university, and that doesn’t even include room and board, books, and other typical costs.
As parents, many of your employees feel they have no choice but to tap into their own retirement funds to help pay for college, even though they’ve heard the financial experts say “there are no grants or scholarships available for your retirement.” Even worse, when a hardship withdrawal is reported for tax purposes as income, it then can make it that much more difficult the following year to be eligible for financial aid using the FAFSA.
So, how can the HR Department help? It all begins with education for the parent to provide alternative ideas on how to fund that huge tuition bill. Some options include applying federal or private student loans, scholarships, altering payroll withholding in anticipation of the American Opportunity Credit or Lifetime Learning Credit, or even introducing some tricks that I used myself to reduce my college costs by taking AP classes or the CLEP test to earn credits without having to pay for (or sit through) the class.
Since many parents aren’t even aware of these strategies, these ideas can be introduced either in a group session by offering a College Planning Workshop, or even better from the employee’s perspective, a one-on-one, individual financial counseling session that delves into their own unique situation. This way, having to take a hardship withdrawal as a last resort can be either eliminated entirely, or at least reduced.
This reminds me of a conversation I had this past tax season with an employee who was struggling to pay a federal balance due because she had taken a hardship withdrawal the previous year, to help pay for her son’s tuition. She was considering withdrawing from an IRA to come up with money to pay the tax bill. If only I had been able to talk to her before she had taken her hardship withdrawal, I could have saved her the 10% early withdrawal penalty that was causing her tax bill, AND she wouldn’t have been frozen out of her retirement plan for 6 months.
How? Well, if she had taken the original withdrawal from her IRA, the IRS recognizes an exception to the 10% penalty for qualified tuition costs, but this exception does NOT apply to employer-sponsored retirement plans. So, by providing access to financial education regarding college costs, you can help your employees keep more money in their pocket instead of the IRS or the university’s coffers.