How to Pay College Tuition from Retirement Accounts

How to Pay College Tuition from Retirement Accounts
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You can take money out of a retirement account to pay college tuition for yourself or a loved one. If the retirement account holds pre-tax dollars, you will have to pay part or all of the income taxes that you previously did not pay. But you will not have to pay the penalty for withdrawing funds before age 59 1/2, as long as you meet certain IRS standards. If you have a 401(k) or 403(b) account, you may be able to borrow from it for college tuition.

Make sure the student qualifies. You can take money out of a retirement IRA for college tuition without having to pay the tax penalty as long as the student is you or your spouse, one of your children, a step-child, a foster child, or one of their descendants.

The student must be enrolled at least half-time, as defined by the school.

Verify the school's eligibility to participate in financial student aid programs administered by the U.S. Department of Education. The school will be able to tell you this. Nearly all universities, colleges and vocational schools--non-profit and for-profit--are eligible. Some educational institutions outside the United States also qualify.

Notify your employer or plan administrator that you need to withdraw money from your retirement account. They will give you the necessary forms and go over the tax consequences with you. If you need to cash out an IRA, contact the bank or company that is holding it. They too will have forms for you and will go over the tax consequences.

Plan to pay up to 20 percent of the withdrawal to the federal government. This covers the income taxes. For example, if you take out $10,000, $2,000 will go to taxes, and you will have $8,000 to apply to your tuition bill. Your bank or plan administrator will tell you how much to withhold for taxes. They will send it to the IRS for you. If you pay in too much, you will receive a refund after you file your annual taxes. State income taxes may also apply.

Be prepared to pay taxes on any money you borrow from your 401(k) or 403(b), if you do not pay it back. You will have five years to pay back the money, but do not need to make regular payments.

Tips

  • Retirement account distributions (withdrawals) for educational expenses can include enough to money to cover books, lab coats, and other required educational goods.

Warnings

  • The amount you withdraw must not exceed your education expenses, otherwise you will have to pay a 10 percent penalty in addition to any taxes you owe.

    Not all employers allow loans from a 401(k) or 403)b).