<p>Is it true that you can borrow without the usual 10% penalty from your 401(k), KEOUGH, or IRA to pay for a child's education?</p>
<p>Yes, under the hardship clause. You have to make the case that it’s a hardship though.</p>
<p>Be very, very careful in thinking about this.</p>
<p>If you borrow from your 401K under the hardship clause based on college costs, you won’t be charged the penalty for early withdrawal. You STILL will be charged state and local income tax on the funds withdrawn. For many families that will be 20-30% right off the top.</p>
<p>But the terrible news is that if you leave that employer for any reason (disability, layoff, change of jobs,…) you’re required to IMMEDIATELY repay the money – just at a time when you’re least likely to be able to do so.</p>
<p>And in the long run, taking from retirement savings to fund current college expenses is likely to have been a terrible financial decision. Choosing a college your family can afford is almost always a much better choice.</p>
<p>I don’t think you pay tax if you borrow, but you need to pay it back (to yourself) with interest, and of course, if you leave your job, you must pay back right away. Early withdrawal will definitely require income tax payment, the early withdrawal penalty may be avoided if you can prove hardship. It is generally not a good idea to touch your retirement for college fund. At the very least, exhaust other funds first including getting loans before considering using retirement fund.</p>
<p>You don’t pay taxes if you borrow from your 401K.</p>
<p>If your 401K allows for after-tax deposits, you may be able to withdraw from those funds without getting hit by taxes, as you’ve already paid them. You would be required to pay taxes on any earnings you withdrew, however.</p>
<p>My understanding about IRAs is that under certain circumstances (including funding college), you can withdraw from them; whether this invokes taxes depends on whether you withdraw from a traditional or Roth IRA, and whether earnings are included in what you’ve withdrawn. I have both a Roth and traditional, and the Roth is the one I’d look to should I need it for college. (I also have a 401K, and that is where the bulk of my retirement funds are.)</p>
<p>Wait, can’t you use your Roth? I thought you could, without penalty.</p>
<p>My husband and I were planning to borrow $10,000 each from our IRAs for each year of my daughters school. They are regular IRAs so we understand that we will need to pay ordinary income tax (Federal, State, and local). I thought the limit was $10,000 per person but is there a different limit for married? I can’t believe that the interest rate on Parent Plus loans is 8.5%! Way too high in my opinion.</p>
<p>I don’t think there is any IRS limit of $10,000 - the only time I’ve heard of that number being applied to IRA withdrawals is for first-time home buyers. For education, the limit (without penalty, that is) is the amount of qualifying education expense. See Pub 970 for details:</p>
<p>[Publication</a> 970 (2008), Tax Benefits for Education](<a href=“Publication 970 (2023), Tax Benefits for Education | Internal Revenue Service”>Publication 970 (2023), Tax Benefits for Education | Internal Revenue Service)</p>
<p>sk8rmom – Thanks! I thought I had read somewhere that there was a $10,000 limit. Is there an income limit? </p>
<p>Also, I know that we must pay ordinary income tax but is it possible that we can pay some at my daughter’s income tax rate which, considering she will be a student, will be much lower than ours. </p>
<p>Can we transfer a limited amount of the money to her as a gift and then pay the money from that account? </p>
<p>Unfortunately we have no money except in our retirement accounts…but fortunately we do have retirement accounts (50% of what we used to have after last year)…</p>
<p>Afaik, no income limit either! There is a $10K lifetime limit on IRA withdrawals for homebuyers, I believe. No, you’ll receive a 1099-R from your IRA holder for the withdrawal which must be reported on your tax return. If you have any Roth IRA’s you would not incur the taxes on the amount that you originally invested - that would be my choice of accounts to raid! </p>
<p>Are you absolutely sure you want to do this if your retirement accounts are down 50% already? It seem to me that a private or PLUS loan would be much less expensive given the tax consequences and investment loss. Remember, especially if you did get any need-based aid, that retirement fund withdrawals will boost your EFC for the following year.</p>
<p>sk8rmom – We don’t have any Roth IRAs but I think I read something that the income cap to convert traditional to Roth is lifted in 2010. I wonder if I should do this with some of my funds.</p>
<p>Hmmmn…we just looked at the high interest rate on the PLUS loans and thought that it seemed too high. I guess I didn’t think of the whole tax picture though. Maybe it would be best to just borrow. We will not get any financial aid but my daughter did receive a good merit scholarship to the school she selected. It’s a very expensive school and we’ll still need to come up with between $25,000 and $30,000 per year. The total cost is about $50,000 and her merit scholarship is $23,000 per year. She had some much cheaper alternatives at other schools but we really want to allow her to choose her top choice – Rensselaer. She will take the unsubsidized loans but I think that is only about $3,000 per year. </p>
<p>We make good income but as with many others there seems as if college is an impossible expense. We have considered consolidating all of our loans, cars, mortgage, home equity into a new mortgage loan…at a significantly lower interest rate. Maybe it would be best to do this and then we could just take on the parent plus loans and just make the payments out of current income.</p>
<p>We’ve already put our first daughter through school…luckily for us she is finishing in 3 years (after this summer) but as of the moment she does not have a job lined up for after graduation (she does have a PT job at school) …I think she will have great opportunity after if the economy improves.
Thanks for your suggestions and let me know if you have any other ideas!!</p>
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<p>The full Stafford loans she’s eligible for as a freshman are $5,500. Up to $3,500 can be subsidized if you had need (COA-EFC), with the other $2,000 unsubsidized. It would be prudent to take any subsidized loans offered, and to consider the unsubsidized too as they’re at 6.8%, the interest can be paid while the student is still in school, and they will not impact your credit.</p>
<p>OK…so can my daughter take $5500 unsubsidized? We won’t have need because the cost of attendance will be about $25,000 to $30,000 per year and we will only have one child in college with two parents working.</p>
<p>We had initially thought that we would have some chance for financial need because my older daughter would be in school at the same time. Instead she decided to finish up this summer…after 3 years. So we’ll just have one child in college next year…as our EFC is definitely over the cost of the attendance.</p>
<p>We’re just trying to figure out the magic formula to come up with the tuition money! </p>
<p>We’ve never transferred any money to our daughters as gifts…is there any advantage of transferring money to a child and then having the child claiming the money at a lower income tax rate while allowing us to deduct the same amount from our income…I really know nothing about how gifts work…anyone? The only place we have any money is in IRAs…so maybe this is not the best way to go.</p>
<p>Is any of the interest on the parent plus loan tax deductible?</p>
<p>Yes, every student that files FAFSA is eligible for a $5500 Stafford loan. Transferring money to anyone as a gift doesn’t make it deductible to you. It will trigger a gift tax for them to pay if it’s over the limit. Probably no benefit to you in this.</p>
<p>Yes, loan interest is deductible. There are a number of credits and deductions for education available including the Tuition and Fees Deduction, Student Loan Interest Deduction, Hope Credit, and Lifetime Learning Credit. You can look them up in IRS Pub 970, but briefly:</p>
<p>You may be able to claim a Hope and Lifetime Learning Credit for the qualified tuition and related expenses of the students in your family (i.e., you, your spouse, or an eligible dependent) who are enrolled in eligible educational institutions. Different rules apply to each credit. If you claim a Hope Scholarship Credit for a particular student, none of that student’s expenses for that year may be applied toward the Lifetime Learning Credit. </p>
<p>You may be able to claim a tuition deduction of up to $4,000 of qualified education expenses paid during the year for yourself, your spouse, or your dependent. You cannot claim this deduction if your filing status is married filing separately or if another person can claim an exemption for you as a dependent on his or her tax return. The qualified expenses must be for higher education.</p>
<p>You may be able to deduct interest you pay on a qualified student loan. And, if your student loan is canceled, you may not have to include any amount in income. The deduction is claimed as an adjustment to income so you do not need to itemize your deductions on Schedule A Form 1040.</p>
<p>sk8rmom – Thank you again…you’ve made me re-think my strategy. I was focused on IRA withdrawals as our magic solution because of the 8.5% interest rate of PLUS Loans but if some or all of the interest is deductible that helps…and maybe loans will help us keep our retirement money intact in case the market eventually brings back some of our losses.</p>
<p>My husband and I have always worked and make decent income…we’ve always socked our money away into retirement savings and have really been hit by the stock market crash. It makes us re-think why we bothered to save so much…instead of putting money into the house remodeling …or basically just spending away as so many others did. Oh well…nothing we can do about it now…poof it’s gone. </p>
<p>At any rate we know that our circumstances are better than many and feel fortunate that our daughter is such a high achiever and feel very lucky that we can borrow to help her get a great education. Her hard work has helped by getting a great merit scholarship.</p>
<p>I’ll spend some time reading Publication 970…I’m sure we probably don’t qualify for many of the tuition help but hopefully some!!</p>
<p>Thanks for your help and pointing out some possibilities!</p>
<p>I thought you could borrow against them without penalty anyway. But you can withdraw from them for education expenses without the penalty (though will pay taxes). I don’t *think *there has to be a hardship though I have not looked into it that much…
<a href=“http://www.irs.gov/pub/irs-pdf/p970.pdf[/url]”>http://www.irs.gov/pub/irs-pdf/p970.pdf</a>
page 68 has the rules. </p>
<p>If you decided to borrow beware the possible pitfalls of borrowing against a company 401k - I believe if you quit or are laid off the loan has to be immediately paid off or they will sell the equivalent value of the account to pay it off.</p>
<p>edit:I read the first response and didn’t see all the other responses (head must be in the clouds today) - so I have repeated advice already given.</p>