Using Retirement Assets to Pay For College

If a person is interested in using his or her retirement accounts to pay for his or her children’s college tuition, there are few differences that the person should take into account:

• If an individual plans to withdraw from an employer plan, such as a 401(k), that individual needs to be aware that if he or she withdraws from those account before that person is above the age of 59 1/2 then he or she will incur a distribution penalty of 10%.
• There is a difference between employer plans and IRAs. Under IRAs, an individual can withdraw funds from an IRA for educational purposes without being subject to the 10% penalty. With this in mind, the funds that are withdrawn are now subject to federal income tax.
• For Roth IRA Accounts, the withdrawn funds will not be subject to either the 10% penalty or the federal income tax. To take advantage of this beneficial account, a taxpayer would have to meet certain guidelines. For example, the taxpayer must own an Roth IRA Account for at least 5 years to take advantage of this provision. 

See Beverly DeVeny & Jared Trexler, Paying the Tuition Bill With Retirement Assets, Smart Money on Wall Street Journal, Aug. 17, 2012.

Special Thanks to Brian J. Cohan for bringing this article to my attention.