• Your retirement savings will not be considered in financial aid formulas. The federal financial aid formula does not consider retirement accounts, including 401(k) plans and individual retirement accounts (IRAs), when calculating your expected family contribution. For other assets, the formula assumes that 5.6% of the parents’ assets and 20% of the student’s assets will be used annually for college costs. Thus, you may actually increase your financial aid award by saving in retirement accounts.

• You can still use these retirement assets to help pay for college costs. Money in IRAs can be withdrawn to pay higher-education expenses before age 59 ½ without incurring the 10% federal tax penalty, although income taxes will be assessed on the taxable portion of the distribution. If the money is withdrawn from a Roth IRA, your contributions can be withdrawn at any time without penalty or taxes, while earnings can be withdrawn before age 59 ½ by paying income taxes but not the 10% tax penalty. With 401(k) plans, you typically can not withdraw the money before retirement age unless it is for a hardship withdrawal, but you can borrow funds if permitted by the plan. If you do not need the money to finance college costs, you can leave it in your retirement plans to continue to grow for your retirement.