Can you use 401k to pay for college

And aside from the logistics, is it even a good idea to? But rather than sticking the cash in their bank account, most people elect to deposit the funds in an IRA. Not every k plan allows in service withdrawals. Not every plan allows hardship withdrawals, either. Fortunately, payment of college tuition and related costs for you, your spouse, dependents, or children are included in that definition.

The bad news? Plus income taxes. It can be costly, though. If you borrow a k loan, you pay yourself back interest with after -tax money. A k provides no separation of after-tax interest payments from pre-tax contributions, so when you begin withdrawing from your account in your golden years, you have to pay taxes on the after-tax portion of your withdrawals again! This is one of the very rare occasions in the U.

Whether you withdraw or borrow from your retirement account to pay for college, years of potential growth are being sacrificed, possibly putting your retirement at risk. Alternatively, there are a number of ways to successfully manage college costs without tapping a k.

If finances are a concern, as they are for most of us particularly now , be sure your child applies to some colleges where they will qualify for significant need-based financial aid or are likely to be recruited with sizable scholarship offers. At Bright Horizons College Coach, our college finance experts help families understand their options to pay for college and find scholarships and merit-based aid.

You can withdraw funds from your IRA without penalty to pay qualified higher education expenses. You can also borrow from your k. There is, however, an exception for distributions used to pay qualified higher education expenses. You will still pay income tax on the portion of the distribution that would otherwise have been subject to income tax. The qualified higher education expenses must be for you, your spouse, your children or your grandchildren.

Qualified higher education expenses include tuition, fees, books, supplies and equipment, as well as room and board if the student is enrolled at least half time in a degree program. Although the amounts in a traditional IRA are sheltered from need-based financial aid, the amounts withdrawn may count as income and affect eligibility for need-based financial aid during the next year. If the distribution is tax-free, it counts as untaxed income and still impacts the need analysis process.

The current year contributions to a traditional IRA are counted as untaxed income, even though the amounts in the IRA are ignored as an asset. As a qualified individual, you can even withdraw money from your IRA for a student that is no longer a dependent. The school that the student will be attending can be private, public, or nonprofit as long as it is accredited by the Department of Education.

If you are withdrawing from a Traditional IRA, the withdrawal amount will be counted as taxable income the year you withdraw. If you are withdrawing earnings from a Roth IRA, you can do so tax-free up to the total amount of contributions if the earnings have been left in the account for five years or more if the earnings are withdrawn prior to five years, they are included as income on your return and you are essentially double taxed as your contributions came from post-tax income as well.