Can You Borrow From Your Retirement Account to Pay for College?

by Melinda Hill Mendoza

If you've raided your piggy bank, your kids' piggy banks, shaken down your couch cushions and gotten all the financial aid you're eligible for, it's time to look to other sources to pay for college expenses. You may be able to borrow from your retirement account, depending on the type of account you have and its rules.

Borrowing from 401(k) or 403(b)

Most 401(k) plans and some 403(b) plans will allow you to borrow up to $50,000 or 50 percent of your account's vested balance, whichever is lower. You don't have to worry about your 401(k) or 403(b) loan being approved, as you're borrowing from yourself. To take out a loan, contact your company's retirement plan provider.

Drawbacks to 401(k) or 403(b) Loans

You generally have up to five years to repay a 401(k) or 403(b) loan, which could be difficult depending on the amount of the loan you've taken out. Your plan may not allow you to contribute to your 401(k) or 403(b) until you repay your loan. If you or your employer terminate your employment any reason, you must pay back the loan, or it's considered a withdrawal, which has significant tax consequences. If your loan is classified as a withdrawal, it's included as part of your income for tax purposes, and, if you're younger than age 59 1/2, you'll also be required to pay a 10 percent early withdrawal penalty.

Short-term Loans From IRAs

You can borrow from an IRA, but you must repay anything you borrow within 60 days, or it's considered a withdrawal and subject to taxes and penalties. You also can't take another loan for one year from the date you withdrew the money; If you take a second loan, it will be considered a distribution. If you have multiple IRAs with the same institution, make sure your repayment goes to the correct IRA. As with a 401(k) or 403(b) loan, you can use the loan for anything you'd like, as long as it's repaid.

Alternatives to Borrowing

If you have an IRA, you can make a penalty-free withdrawal for educational expenses. You may owe income taxes on the withdrawal, however. You have to use the money for educational expenses, including tuition, books, and room and board. The funds can be used for educational expenses for yourself, your spouse, your children and your grandchildren. You must use money withdrawn from an IRA for educational expenses incurred that year; in other words, you can't withdraw money one year and save it to pay for the next year. You can also make a hardship withdrawal from a 401(k) or 403(b), but you must have exhausted all other financial options, including taking out a 401(k) or 403(b) loan, and you will pay penalties and any applicable taxes on the withdrawal.

About the Author

Melinda Hill Mendoza has been writing professionally for over 10 years. She worked as an editorial assistant for Forward Movement Publications in Cincinnati, Ohio. She wrote for several years for allmusic.com and edited and wrote a chapter for a book with Wooster Press. She graduated from Miami University in Ohio with a Bachelor of Arts in English.

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