Question: Should I take money out of my 401k to pay for my child’s college tuition?

GraduateAnswer:  We don’t recommend it.  Your 401k needs to be all about your financial security in retirement.  It is not a savings account or emergency fund.  Many employers do offer a loan provision, but you need to know about potential pitfalls in taking out a 401k loan.

The loan must be paid back through after-tax payroll deduction.  If you are unable to make those loan payments then the balance owed is in default and will become fully taxable.  Also, if you should change jobs while you have an outstanding 401k loan, the loan will become due in full with your last paycheck.  If you can’t pay it, it is all taxable and could also have a 10% penalty attached if you are under age 59 ½.

The best way to save for college is to keep it totally separate from your 401k.  If you have not done that and it is now time for college, there are many loans available for parents and for students and many have very attractive interest rate provisions.  But when was the last time you heard of someone loaning you money for your retirement?

Protect your 401k and don’t dip into it before retirement because it is very difficult to catch up.  And, by the way, Student Aid forms do not count parents’ retirement accounts in assets for college, so you shouldn’t either.

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