By Lindsay Adams, CFP®
You’ve spent years diligently building your retirement savings, but life doesn’t stop just because you’re preparing for the future. What happens when life’s big milestones like college tuition, a dream home, or a family emergency compete for your financial attention?
When you leverage smart investments and borrow strategically when needed, funding major purchases without sacrificing retirement becomes much easier.
Address Retirement First, Then Fund Life’s Big Moments
For many of our clients, prioritizing retirement savings early allows them to navigate major life expenses with less stress later on. Regular contributions to your 401(k), IRA, and/or other accounts are essential.
Once your retirement savings are automated and on track, you can begin planning for major non-retirement expenses—whether that’s a child’s college education, a second home, or helping your parents with long-term care costs. Dedicated savings accounts, including 529 plans and brokerage accounts, can help you compartmentalize these goals.
529 Plans for College Savings
One of the most powerful tools for college funding is a 529 plan. These accounts offer:
- Tax-free growth on contributions
- Tax-free withdrawals for qualified educational expenses
- State tax deductions: In Kansas, you may deduct up to $3,000 per beneficiary (or $6,000 if married filing jointly) from your state income tax
You can even use 529 funds for things beyond tuition, such as room and board, books, and computers. And new federal rules now allow limited rollovers from 529s into Roth IRAs—another planning strategy to explore.
Use Your Investments Wisely Without Derailing Retirement
Unlike your retirement account, your brokerage account isn’t tax-advantaged. For many of our clients, brokerage accounts are a sound way to fund larger purchases for a few different reasons:
- Investments are generally liquid.
- You can avoid early withdrawal penalties on retirement accounts.
- If you liquidate poorly performing stocks, you could also lower your capital gains taxes.
Before you start selling off investments and withdrawing funds from your brokerage account, work with your financial advisor to create a plan. This critical step can save you thousands in the long run.
For instance, if you want to fund a large purchase with investment proceeds, it’s almost always best to stagger your withdrawals across multiple tax years. Otherwise, you run the risk of jumping a tax bracket and owing much more income tax than you anticipated.
After you make your withdrawals, take the time to work with your advisor to rebalance your portfolio. When you liquidate a large portion of your portfolio, your asset mix is disrupted. Intentional rebalancing can bring things back into equilibrium.
More Strategies to Fund Life’s Big Expenses Without Raiding Retirement
Many of our clients rely on strategies like the following to pay for large purchases with minimal impact on their retirement savings (or their tax bill):
Using Home Equity Loans and Home Equity Lines of Credit (HELOCs)
If you need access to significant capital, tapping into the equity in your home can be one option to consider. Depending on market conditions and your credit profile, interest rates may be competitive, and it’s generally less risky than borrowing from your retirement accounts. However, it’s important to carefully evaluate the terms, understand the potential for variable rates, and have a steady repayment plan in place.
Making Tax-Efficient Withdrawals
For most clients, the most tax-efficient way to fund purchases is to:
- Withdraw from taxable accounts first (e.g., brokerage)
- Next, use tax-deferred accounts (e.g., traditional IRAs)
- Last, access tax-free accounts (e.g., Roth IRAs)
This approach allows tax-free accounts more time to grow while controlling your annual tax liability.
Leverage Dividend and Interest Income
If your portfolio includes dividend-paying stocks or interest-generating investments, consider using those income streams to help cover your regular expenses. Qualified dividends may be taxed at favorable rates, and interest from certain bond payments may be partially or entirely tax-exempt. Be sure to disable any automatic reinvestment features in your brokerage accounts so the cash is available for spending rather than being reinvested.
Avoid Early Withdrawals from Retirement Accounts
Taking money from tax-advantaged retirement accounts before age 59½ can cancel out some of your disciplined saving. Early withdrawals are generally taxed as income, and you must pay an additional 10% penalty.
Your Guide to Big Purchases, Retirement, and Everything In Between
The key to balancing retirement and large financial goals lies in planning ahead and using all the tools available to you: tax strategies, investment accounts, savings vehicles, and more.
Ready to make confident decisions about big expenses without compromising your future? At CGN Advisors, our fee-only, fiduciary approach puts your goals first—from retirement to real-life priorities.
If you have questions about our firm and how we may be able to assist you, contact us online or call (785) 340-3434.
Frequently Asked Questions About Paying for College and Big Purchases Without Hurting Retirement
Can I pay for my child’s college without using retirement savings?
Yes, you can fund college expenses without dipping into your retirement accounts by using tax-advantaged options like 529 plans, brokerage accounts, or home equity loans. Planning ahead and working with a financial advisor can help you avoid penalties and preserve your long-term savings goals.
What are the best accounts to use for large purchases or college tuition before retirement?
Brokerage accounts, 529 plans, and home equity loans are often ideal for big purchases and paying for college tuition. These options offer liquidity and flexibility without the tax penalties that can come from early withdrawals on retirement accounts.
How can I avoid taxes or penalties when funding a large purchase?
To minimize taxes and avoid penalties, consider selling taxable investments with low gains, using dividend or interest income, and staggering withdrawals over multiple tax years. Avoid early withdrawals from retirement accounts unless absolutely necessary, as they often trigger income tax and a 10% penalty.
About Lindsay
Lindsay Adams is a Lead Advisor at CGN Advisors, a Fee-Only, financial advisory firm based in Manhattan, Kansas. She is a CERTIFIED FINANCIAL PLANNER® professional and holds the Certified Farm Succession Coordinator designation. In her role, Lindsay aims to walk alongside her clients as they navigate financial decision-making, and she loves seeing them accomplish their goals with actionable steps and experience the financial freedom to do what their heart desires. With a mission to serve others, she genuinely cares about what goes on in her clients’ lives, the big and the small, beyond the financial.
Lindsay graduated from the Personal Financial Planning program at Kansas State University with a minor in business. Prior to joining CGN as an Associate Advisor, Lindsay gained experience in different aspects of the financial services industry. She worked in banking during high school and college and helped fellow students at a financial counseling on-campus job, which showed her many different ways people interact with money and spurred a desire to assist others in financial planning. Outside of work, Lindsay is active in her church, enjoys singing and being outside, whether running or hiking, and spending time on the farm. She’s always looking forward to the next travel adventure. To learn more about Lindsay, connect with her on LinkedIn.
Investment advisory services are offered through CGN Advisors, LLC, a fee-only SEC registered investment advisor. Tel: (910) FEE-ONLY.
Investing involves substantial risk and has the potential for partial or complete loss of funds invested. Investments mentioned may not be suitable for all investors. Before investing in any investment product, potential investors should consult their financial or tax advisor, accountant, or attorney with regard to their specific situation. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.
The opinions expressed herein are those of certain CGN Advisors, LLC personnel and are subject to change without notice. The opinions referenced are as of the date of publication and are subject to revision due to changes in the market or economic conditions and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author, may differ from the views or opinions expressed by other areas of the firm, and are only for general informational purposes as of the date indicated.