If you are older than 59, 5 years of age, or you are after the age of 55. If you have separated from your employer by the time you reach the age of 50, you can pay your 401 (k) for something you like. If you are younger, you can still withdraw money from your 401(k) to pay college loans, but the IRS imposes a 10% penalty on the amount of your withdrawal in addition to any income tax due. However, there are some ways you can use your retirement savings to pay for your education without paying this penalty.
Hardship Withdrawal
If you have already attended college and used student loans to pay your tuition, a hardship withdrawal cannot be used to repay your loans. However, if you plan to attend school in the next 12 months and cannot otherwise afford to pay your tuition, you may be able to withdraw money from your 401 (k) to pay for your tuition, room, and board.
In addition, you may be able to initiate a hardship withdrawal to pay the tuition and education costs of a child, spouse or indigent who plans to attend school within 12 months.
Requirements
To qualify for a hardship, you must meet certain criteria. First, you must be able to prove that your need is immediate and severe. A student loan is not an immediate expense because it already provides for repayment over time. However, tuition for the upcoming school year is considered immediate.
In order for your needs to be classified as severe, the costs must be so large and great that they cannot be covered simply by a few more hours or by turning off your weekly movie night. Besides college tuition, other expenses that are considered immediate include a down payment on a primary residence and qualifying medical expenses that exceed 10% of your adjusted gross income (AGI).
When assessing your needs, your plan administrator will evaluate all other assets available to you, z. B. Checking or savings accounts, investments, and real estate holdings. If liquidating any of your other assets will allow you to pay your tuition without taking a distribution from your 401 (k), your hardship case will be denied.
Be your own lender
Instead of taking out traditional student loans, you can finance your college education by borrowing from your 401 (k). Instead of paying interest to a bank, repay the loan to your own retirement account, including interest. In addition, qualified loans from your 401 (k) are not subject to income tax because the funds are repaid within a specified time period.
Loans from your traditional or Roth 401(k) retirement account are limited to 50% of your vested account balance, up to $50, 000.You can take out multiple loans at different times, but your maximum balance may not exceed $50.Do not exceed 000.
Loans from your 401 (k) generally must be repaid within five years in regular, substantially equal payments at least quarterly. However, if you serve as a reservist in the U.S. military and are called to duty, the term of your loan will be extended by the length of your service.
A direct distribution from your 401(k) to repay your student loans is not the most efficient use of your retirement savings. However, if you haven't gone to school yet, you can use your savings with a little careful planning.
If you qualify for a hardship withdrawal, you can draw retirement benefits up to the amount of your tuition and expenses without additional taxation. Even if you don't meet these strict criteria, you may still be eligible for a tax-free loan of up to 50.Taking out a $000 loan so you can attend a university without sacrificing your long-term savings.