Can You Borrow From Retirement for College?
Funding a child's college education can be a big expense, with the rising costs of colleges across the world. While some parents set up a special college savings account, others plan on using retirement money to pay for this need. In fact, according to a recent poll by Gallup, 25 percent of parents plan on using their retirement funds to help pay for a child's education.
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Tapping IRA
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The individual retirement account is one type of account that you could tap to help pay for a child's college education. When you have an IRA, you typically are charged a 10 percent early distribution penalty when you take money out before you reach the age of 59 1/2. One exception to this rule is when you take the money out for college education. You can avoid the 10 percent penalty in this situation. When you take money out for education, you are not technically borrowing, because you do not have to pay the money back.
401(k) Loans
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Another option that you may need to consider is borrowing money from a 401(k). The 401(k) is an employer-sponsored retirement plan that allows both you and your employer to save for your retirement. With this type of plan, you may have the option of borrowing against the money in your account through a 401(k) loan. When you use a 401(k) loan, you can borrow up to 50 percent of the account balance, but you must pay it back with interest in the future.
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Qualifying Expenses
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When you take money out of your IRA for the purpose of paying for college, you have to use the money on qualified expenses. If you do not use the money for the appropriate purposes, you will be charged a 10 percent early distribution penalty on that amount. You must use the money on expenses like college tuition, room and board, books and fees. To get the penalty exemption, you must file Form 5329 with the Internal Revenue Service.
Considerations
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Although you can borrow money from your retirement to pay for college expenses, this is not always the best approach to take. Setting up a college savings plan such as a 529 plan would be a better choice. With a 529 plan, you can still avoid paying taxes on investment gains as long as you use the money for college expenses. Even if you do not get all the money you need saved, federal student loans have very low interest rates.
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