Key Takeaways
- Medical school can cost $300,000 to $400,000, and parents often consider tapping their retirement funds to help.
- Experts strongly discourage this because large withdrawals trigger heavy taxes and penalties.
Four years of medical school cost a median of $297,745 at public schools and $408,150 at private institutions, according to the Association of American Medical Colleges.
For parents who want to help, those sums can make retirement accounts, often their largest asset, look like the obvious solution. However, experts strongly advise against raiding 401(k)s and individual retirement accounts for your child’s education.
“Every situation is different, but in general, you shouldn’t pay your child’s medical school with money from a retirement account,” said Carolyn McClanahan, founder and president of Life Planning Partners. “As the saying goes, ‘You can borrow for college, but you can’t borrow for retirement.’”
Why Retirement Savings Should Be a Last Resort
When you take money from a traditional 401(k) or IRA, you pay income tax on the amount. There’s also a 10% penalty if you’re under 59½, plus the loss of decades of compounding.
Even modest withdrawals can cut your retirement savings by hundreds of thousands, potentially forcing you to delay retirement, tighten your budget, or depend on the child you were trying to help.
Say you’re under 59½, have a joint income of $160,000 and a local tax rate of 5%, and need $300,000 from your 401(k) to put your child through medical school. To get that amount, you’d have to withdraw about $520,000, with about $220,000 lost to penalties and taxes. A withdrawal this large pushes much of the money into higher tax brackets.
That’s just to start. The real damage comes from the loss of decades of compounding. Assuming an 8% annual return, that $520,000 could have grown to about $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.
Smarter Alternatives
The most sensible strategy is usually a medical school loan. While interest rates are higher than a decade ago, these loans offer income-driven repayment, deferment during residency, and forgiveness for those who end up working at qualifying nonprofit or public hospitals. if your child works in qualifying nonprofit or public hospitals.
Parents might not feel comfortable suggesting their child get a loan. But, according to McClanahan and other experts, it makes more sense for the student to repay debt with future earnings than for parents to drain retirement savings.
Most doctors earn enough to repay the loans comfortably. Retirees, by contrast, can’t take out loans to replace money spent from a 401(k) or IRA. Once retirement funds are gone, they’re hard to rebuild.
Scholarships, grants, and service programs can reduce costs, and you can still help with smaller contributions.
When Using Retirement Savings Might Make Sense
The only time it could make sense to tap into retirement savings is if your nest egg holds up without the funds, there are no cheaper alternatives, and careful tax planning is done beforehand.
“It is important to do good tax planning to make sure you aren’t bumping yourself into high tax brackets with the distributions,” said McClanahan. “If you are working while withdrawing the funds, this could easily happen.”
“Remember that once you take that money out, you can’t put it back, so you miss out on those tax-deferred earnings forever,” she said.
Wanting to fund your child’s medical school is understandable—but not at the cost of your own financial security. The most generous thing you can do may be protecting your retirement so you don’t end up depending on the child you’re helping.
Let them borrow, and you can help where it makes sense. But prioritize keeping your nest egg intact.