Using 401k Funds for Education

Many people invest in 401k retirement funds for their retirement. However, a 401k can be used for other reasons like education. Even though a 401k retirement fund isn’t design to fund an education, it still can be used to pay for college. There are many factors to consider that investors should be careful about. Before making a decision on whether or not you should use a 401k for an education, a comparison between 401k’s and other college fund investments should be looked at. Some college funds are easier to use for an education, but under certain circumstances, the investor may want to simplify their investments by using a 401k.

Parents who have multiple kids may have to cover the ever increasing costs of college by using a certain percentage of their 401k. Public colleges can cost around $13,000 a year while private colleges can cost around $30,000 a year. These increasing costs associated with education make it harder on parents to cover their children’s education costs. Parents may have no choice but to use a certain amount of their 401k accounts to fund educational costs. The best way to use a 401k for educational expenses is borrowing from the 401k. Parents can borrow from their own 401k account at anytime to fund their children’s college expenses.

People who are borrowing from their 401k plan to pay for college should try to avoid job changes throughout the remaining period of the loan. Loans usually have a maturity date of 5 years with interest during the loan. If there is a job switch, the owner of the 401k account must pay off the loan before rolling it over to the new company. Once the 401k account is paid off, the owner of the account will receive their full investment, and they will be able to roll it over to the company they switched to.

Another step to consider in order to avoid additional fees when borrowing from a 401k account is requesting a hardship withdrawal. Withdrawals made from a 401k account must be used for special circumstances that the IRS deems legitimate. Financial hardship, emergencies and educational purposes are all considered legitimate reasons to request a hardship withdrawal. Early withdrawals from a 401k, however, impose a 10 percent penalty fee on the owner of the 401k account. The challenging part when applying for a hardship withdrawal to avoid the 10 percent fees may be difficult for many 401k account holders.

Investors should also consider other alternative ways to utilize their 401k account for education. Closing a 401k account is another way to fund an education. However, when closing a 401k account, the owner of the account may be taxed in a higher income tax bracket. Be sure to figure these facts out before taking action. Closing a 401k account early also implies a penalty fee as well. Smart investors will roll over their 401k’s to IRAs for more flexibility. The name of the game is creating liquidity when funding an education.

Rolling over a 401k to an IRA will provide the liquidity needed to fund an education. This also helps the 401k account owner to avoid any fees that are associated with early withdrawals. Depending on what works best will vary from person to person. Those who are interested in skipping out on fees or paying interest on a 401k loan can avoid these altogether by rolling the account over to an IRA. Those who don’t want to mess with an IRA and have sufficient funds in their 401k can still hold their account and fund educational expenses. Make sure to compare these options side by side before making a final decision.

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