<p>I am over 60. Can I use my 401k to finance my child's college education without any penalty or repayment? Is it only tuition or room and board also? Would the payment have to be made directly to the university from the 401k account (not comingling with my checking account)?</p>
<p>Apple5, you should probably consult a financial manager before you opt to do this. It’s usually not recommended that a parent pay for college with their retirement. Lots of horror stories.</p>
<p>If you are old enough to withdraw whatever you please from your 401k, you could do so. If your question has to do with taxation and withdrawals from your 401k, you should speak with an accountant.</p>
<p>And I do agree with Agentninetynine: unless you have way more money in your retirement accounts than you could ever hope to use up, think twice about taking money out of your 401k for your kid’s education. I’ve heard a few horror stories too.</p>
<p>I would think that you have to pay the tax but I’m not an expert. </p>
<p>You basically want to effectively fund a 529 from within a 401K or rollover IRA with pretax money. That’s a combination I hadn’t heard of before but I have to hand it to you is quite creative.</p>
<p>Another option is to take new money that you had planned to put into your retirement accounts, and instead divert those funds for a couple years into a new 529 — if you can afford it. Many states provide state income tax advantages for contributing towards a 529. </p>
<p>In my state, a state income tax deduction of up to $26,000 a year for a married couple is allowed for contributions to a 529 - and it can be any 529 in the country, not just my own state’s 529. In my state, they also don’t require that the money sit in the 529 for any length of time. Therefore, someone could put the money into the 529 a couple months before each tuition and housing bill is due, and still get the income tax deduction.</p>
<p>59 1/2 is when the 10% penalty goes away. You will still pay taxes on the money you withdraw. Be very careful about using your retirement funds for college expenses. I agree, consul a financial planner that is well versed in using these funds for college costs to make sure you aren’t hampering your own retirement.</p>
<p>As was said, no penalty if over 59 1/2. The money you take out would be yours to do with as you please and 100% taxable in the year you take the withdrawal (unless you have some after-tax money in your 401k). College expenses have nothing to do with it, so yes, you can put it right into your checking account. </p>
<p>I am a financial advisor and often recommend what has been mentioned here - before the college bill is due contribute the money to a 529 plan, select the least volatile investment choice, then use the 529 to pay the college bill. This gets you a state tax deduction in many states - so only applicable if you get that deduction. It’s like a free 7% deduction for many! You’re spend the money on college anyhow, so same $$$, just a different path to the college.</p>
<p>Also, I agree that at age 60 you’d better have plenty of “extra” retirement savings r depleting the 401K may really hurt your retirement plans. You can borrow for college and/or pay out of current cash flow from jobs - you can’t really borrow for retirement and you have no job cash flow in retirement!</p>
<p>If you have retirement income from your 401k at some point, you can repay a reasonable loan with part of that income. That is a better plan, in my opinion, than taking money out of the account, paying taxes on it now, and reducing your 401k balance.</p>
<p>I will add, I am not a financial planner…just a parent.</p>
<p>I want to add, are you considering applying for need based financial aid? If so, leave the funds in your 401(k) alone. The financial aid formulas do not count the parent’s retirement accounts as assets available to pay for college.</p>
<p>I have also frequently heard the expression that you can borrow for college, but you can’t borrow for retirement.</p>
<p>rundmc123–are you saying that one should open a 529 plan, if there isn’t one already, put money into that in say August and pay college tuition bill from that account in say September?</p>
<p>Steve: </p>
<p>You have to check the rules in your own state to see whether they have a minimum time period that money must be kept in the 529 account, including whether there is a minimum time for tax benefits. In Pennsylvania, there is no minimum time, but other states may vary.</p>
<p>Also, be aware that not all 529 plans may be fast in processing accounts and distributions, so don’t cut it too close. </p>
<p>(To keep your tax accounting simpler, it is best to make 529 account withdrawals and college payments in the same calendar year. It is best to avoid, for instance, withdrawing the money in December and paying the tuition in the following January.)</p>
<p>charlieschm–Yes, I know the funds need to be withdrawn in the same year, I’m ok with that. I’ve been looking online and can’t find anything that says there is a minimum time the account has to be open. We will also be dealing with scholarships so putting funds in and having a rapid turn around time on withdrawals will help immensely with that. It just sounds a little too good to be true that you could conceivably funnel $60,000 or so through an account in a month and take the tax write off. If we can YAHOOOOOO!! I have an email into our planner to check into this!!</p>
<p>SteveMA…you also need to see whether YOUR state offers that tax advantage. Some do and some don’t.</p>
<p>Regardless, I would not suggest doing this with money from a retirement account.</p>
<p>SteveMA - If you happen to be in Massachusetts (from your name?), there is no tax deduction available for deposits made to 529 accounts!</p>
<p>Keep in mind that any withdrawals from your 401K is considered as income by the college and will raise your EFC for the following year. This will significantly impact any need based aid. It also treated as an asset if it is still in your hands when you file for financial aid.</p>
<p>Yeah, you certainly need to find out about YOUR state’s 529 plan. Is there even a deduction for 529 contributions? Any time limitations to take that deduction? How long to turn it around? Is there a cap on the deduction. Here in NY State a couple can deduct up to $10,000 from their NY State income taxes for 529 contributions in that calendar year. I am not aware of any amount of time the money needs to be in the account before it can be used for college expenses. I don’t recommend cutting it close though.</p>
<p>I am not up on the details of each state to you’d have to check on that yourself. I doubt any allow a $60k deduction though! I’m happy to take my $10k NY State deduction each year, saving us about $700 in taxes each year. It is something of a “too good to be true” deal - love those!</p>
<p>rundmc123–I should know better then to post “numbers” stuff that early in the morning. I knew I was missing something because it sounded too good to be true–I was thinking FEDERAL deductions and I know there isn’t any for that. Now that my brain is out of neutral, 529 isn’t worth it for us, no state matching or deductions/credits. Now, if I could figure out a way to shelter $70,000+ year of funds to pay for college on the federal level, legally, that would be good :D.</p>
<p>There are some provisions for a person paying off college loans to take a federal deduction on those payments.</p>
<p>I personally believe in taking out the maximum amount of federally subsidized loans each year, because the interest rate may increase in later years. It is still scheduled to go up from 3.4% to 6.8% for new subsidized Stafford loans starting fall of 2013. Congress will be under pressure to not allow that big an increase, but I’ve heard they may occasionally have some trouble getting along with each other.</p>
<p>It would be better to get HELOC and withdraw the 401K fund after you retire.</p>