Should You Use Your Retirement Funds to Cover Your Child’s Medical School Expenses?

Main Points to Remember

• The cost of attending medical school can range from $300,000 to $400,000, leading some parents to consider using their retirement savings to assist their children.

• Financial professionals strongly advise against this approach, as withdrawing large sums from retirement accounts can result in significant taxes and penalties.

According to the Association of American Medical Colleges, the median expense for four years of medical school is $297,745 at public universities and $408,150 at private ones.

Given these high costs, parents may be tempted to use their retirement funds—often their largest asset—to help pay for their child’s education. However, experts caution against withdrawing from 401(k)s or IRAs for this purpose.

“While every family’s circumstances are unique, it’s generally unwise to use retirement savings to cover your child’s medical school tuition,” says Carolyn McClanahan, founder and president of Life Planning Partners. She adds, “You can take out loans for education, but there are no loans for retirement.”

Why Retirement Funds Should Be a Last Resort

Withdrawing money from a traditional 401(k) or IRA means you’ll owe income tax on the amount, and if you’re under 59½, you’ll also face a 10% early withdrawal penalty. Additionally, you lose out on years of potential investment growth.

Even relatively small withdrawals can dramatically reduce your retirement nest egg, possibly forcing you to postpone retirement, cut back on spending, or even rely on the child you intended to support.

For example, if you’re under 59½, have a combined income of $160,000, face a 5% state tax, and need $300,000 from your 401(k) for medical school expenses, you’d actually need to withdraw about $520,000. Roughly $220,000 would be lost to taxes and penalties, and much of the withdrawal would be taxed at higher rates.

But the most significant loss comes from missing out on compound growth. At an 8% annual return, that $520,000 could have grown to approximately $1.12 million in 10 years, $1.65 million in 15 years, $2.42 million in 20 years, and $3.56 million in 25 years.

Better Ways to Pay for Medical School

Taking out a medical school loan is often the most practical solution. Although interest rates are higher than in the past, these loans offer options like income-driven repayment, deferment during residency, and loan forgiveness for those who work at eligible nonprofit or public hospitals.

Parents may hesitate to suggest loans to their children, but as McClanahan and other experts point out, it’s more reasonable for students to repay debt with their future earnings than for parents to jeopardize their own retirement security.

Additional Considerations

Most physicians eventually earn enough to pay off their student loans. Retirees, on the other hand, cannot borrow to replenish depleted retirement accounts. Once those funds are spent, rebuilding them is extremely difficult.

There are also scholarships, grants, and service programs that can help reduce the financial burden. Parents can still contribute smaller amounts without risking their own financial future.

When Using Retirement Savings Might Be Justified

Withdrawing from retirement accounts may only be reasonable if your retirement plan remains secure without the funds, no better alternatives exist, and you’ve carefully considered the tax implications in advance.

“It’s crucial to plan your taxes carefully to avoid pushing yourself into higher tax brackets when making withdrawals,” McClanahan advises. “If you’re still working while taking out funds, this risk increases.”

She also warns, “Once you withdraw that money, you can’t put it back, and you lose the benefit of tax-deferred growth forever.”

While it’s natural to want to support your child’s education, it shouldn’t come at the expense of your own financial well-being. The most supportive thing you can do may be to safeguard your retirement, so you don’t become financially dependent on your child later.

Allow your child to take out loans if necessary, and offer help where it’s feasible—but always prioritize protecting your own retirement savings.