Life and Money With Helaine

Hi, Helaine: I have two sons who will be entering college in 2021 and 2022. My husband and I did the Maryland prepay plan for several years. But we quickly realized they might not want to stay in Maryland, so we stopped contributing. Then we got divorced three years ago and stopped saving for college altogether.

So I am wondering: Is it smart to borrow from your 401(k) and repay yourself because you are paying the interest to yourself, not an institution? Or is it more harmful because you essentially take that money away from potential growth in the market? -- College Mom

Dear College Mom: There are no do-overs when it comes to retirement planning. Do not risk your financial future to pay your children's college tuition bills, no matter how tempting it is.

I'm guessing you haven't contributed to a 529 account or otherwise put aside money for college because you believe you can no longer afford to do so. Borrowing money from your 401(k) to pay for college stands to make your financial situation worse.

As you know, when you take money out, that's money you are not investing, costing you potential gains. Second, if you borrow money from your 401(k) and then lose or leave your job and you are younger than 59 1/2, you will most likely need to repay the sum within 60 days, or you will pay the 10 percent penalty for early withdrawal as well as face a bill from the tax man. Moreover, if you lose or leave your position, the chances are good you won't repay that loan.

Finally, while you can use the money placed in the Maryland Prepaid College Trust (as it is properly called) toward the tuition bill at out-of-state or private colleges, it's quite possible that won't be necessary. As much as your children might not want -- to quote you -- to attend your state university, it might just be the right decision financially.

(To ask Helaine a question, email her at askhelaine@gmail.com.)

(EDITORS: For editorial questions, please contact Sue Roush at sroush@amuniversal.com)

Hi, Helaine: I am a Peace Corps volunteer in Africa. I have been in my assigned country for about a year, and I have one more year to go.

I'm writing because of my student loans. I was fortunate enough to only need to take out about $8,500 combined to earn my undergraduate and master's degrees. Before I left for Africa, my payments were $90 a month. But even though my debt is manageable, I can't wait for some of it to be canceled.

Peace Corps volunteers accrue a small readjustment allowance for their two years of service, somewhere around $8,000 in pre-tax income. The money is supposed to help me when I return to the United States and begin looking for a job. I also recently opened an IRA and rolled over the very small amount -- I mean very small, it's about $700 -- I earned from my job before my Peace Corps service. I know I could max out my IRA contribution with part of my readjustment allowance, which would make me more comfortable about my long-term financial situation.

My questions: Should I take my readjustment allowance and pay down my student loan debt in its entirety, or as much as I can? Should I put 15 to 20 percent in my IRA? I know my monthly loan payments are manageable, and an easy way to maintain good credit, but I would also rather not pay more interest than I have to. I'm torn between the two ideas. Help! -- Torn Between Two Options

Dear Torn: You need to take a step back. First, it's quite possible you'll need to live on your readjustment allowance for a time. Unless you are planning to move in with family, you'll need it not just to get by day-to-day, and not just to pay rent, but you'll also need to stretch it so it can cover a security deposit at your new residence. As you noted, $8,000 is not a lot of money, and you will find, especially if you decide to set up in a high-cost metropolitan area, you'll go through the sum quicker than you realize.

If, however, some of it is left over after you get a job, I notice you don't mention a third option: emergency savings. You need to put money aside for when things go wrong -- and make no mistake, things will go wrong occasionally. (Just ask the 800,000 federal workers who were recently furloughed, with their pay delayed.)

I understand the desire to pay down your student loans, but given the low monthly bill due, I would not consider it a financial priority. As for retirement savings, remember what I said about an emergency account? Once money goes into an IRA, it can't be withdrawn without paying a financial penalty except in limited circumstances. My advice: Unless you already possess three months of savings for unexpected events, use this money to make that happen.

(To ask Helaine a question, email her at askhelaine@gmail.com.)

(EDITORS: For editorial questions, please contact Sue Roush at sroush@amuniversal.com)

Hi, Helaine: I'm planning to retire in two years, when I turn 70. For the past two years, I upped my contributions to my 401(k), and am now having 26 percent of my gross pay taken out.

I just discovered the payroll company my employer switched to in February of last year calculated my taxes on my gross pay as if I was not taking out money pre-tax for a 401(k) contribution. I may have lost $5,500 in pocket money over the year! This money could have been earning interest in the bank, or I could have used it to help pay my daughters' student loans.

The company is now dumping it in my lap. They told me I should get the money back, but there is no guarantee of it. What can I do? -- My Employer Taketh

Dear Employer Taketh: I totally understand your fury. I'd be angry too. I reached out to David Oransky, a certified public accountant based in Missouri, on your behalf. He says it's unlikely you'll have a problem recovering your funds. As long as your W-2 accurately reflects the situation, you should receive the money back as part of your (obviously) larger-than-normal tax refund for 2018.

But that does beg another question: What if the W-2 is wrong and is coding the money as a post-tax contribution? In that case, you will need to contact your employer and its payroll service, and get them to issue a corrected W-2, something they are most certainly obliged to do.

After that, your next decision will be what to do with the recovered money. I've got no advice on that one. You sound responsible, and I trust you to get that decision right.

(To ask Helaine a question, email her at askhelaine@gmail.com.)

(EDITORS: For editorial questions, please contact Sue Roush at sroush@amuniversal.com)