Minimizing the Tax Impact of College Tuition on Your Retirement Plan

Retiring early is a dream for many, but it can have unexpected consequences, such as increased tax bills for those with college-bound children. Some of my friends were lucky enough to retire before their kids attended college, but this also meant that college expenses could potentially raise their tax bills.

During retirement, many people rely on income from their retirement plans to cover daily expenses. To minimize taxes, they only withdraw what they need. However, when their children go to college, they may need to withdraw more to cover expenses, causing their annual withdrawals and tax bills to increase due to the jump in tax brackets."

2022 ​Taxable Income for Married filing Jointly	​Tax Due
Not over $20,550	10% of the taxable income
Over $20,550 but not over $83,550	$2,055 plus 12% of the excess over $20,550
Over $83,550 but not over $178,150	$9,615 plus 22% of the excess over $83,550
Over $178,150 but not over $340,100	$30,427 plus 24% of the excess over $178,150
Over $340,100 but not over $431,900	$69,295 plus 32% of the excess over $340,100
Over $431,900 but not over $647,850	$98,671 plus 35% of the excess over $431,900
Over $647,850	$174,253.50 plus 37% of the excess over $647,850

For instance, in the 2022 tax year, a married couple that withdraws $60,000 annually falls under the 12% tax bracket. However, if they withdraw an extra $50,000 for their children's college expenses, they will jump to the 22% tax bracket, resulting in significant tax implications. To reduce the impact, they can withdraw extra money up to the upper limit of the 12% tax bracket in the years leading up to their children's college years. They can then use the money saved during those years to avoid crossing into the 22% tax bracket when their children start college.

Disclaimer: This financial opinion is for informational purposes only and should not be considered as financial advice. We do not guarantee its accuracy or completeness, and any investment decisions made based on this opinion are at your own risk. Please conduct your own research before making any investment decisions. We are not liable for any losses resulting from the use of or reliance on this opinion.