Tapping Qualified Retirement Plans to Pay

Educational Expenses

Recall our earlier discussion of Traditional IRAs in the Retirement Planning section of the book.  Remember that if you draw money out of such an IRA prior to reaching age 59-1/2, you not only have to pay regular income tax on it but generally have to pay a 10% excise tax to boot (see page 74).  An exception to the 10% excise tax, however, is a withdrawal to pay tuition, fees, books, and (if at least half time) room and board.  Regular income tax would still be owed but not the 10% excise penalty tax.

Although this is an option open to you, DO NOT DO THIS.  It is one thing not to make a retirement plan contribution in a given year if other financial demands are extreme, but tapping an existing retirement account (and paying regular income tax on it) should be a last-resort act.  Why?  You are eating your retirement seed corn.

Recall our discussion of the Roth IRA in the Retirement Planning on page 75.  One of the favorable tax features of the Roth is the ability to withdraw a contribution (not earnings on those contributions) at any age without tax penalty.  Thus, if you have a Roth IRA, tapping your contributions to it is a better idea than tapping into a Traditional IRA.  Still, as I just discussed with regard to the Traditional IRA, I don't like this idea one bit.  Again, you are eating your retirement seed corn.

The only option I think acceptable with regard to tapping Qualified Retirement Plans to satisfy educational expenses-and I very hesitatingly approve of this approach-is borrowing against your pension, profit-sharing or Section 401(k) employer-sponsor qualified retirement plan.  I discuss the methodology for doing this in the Miscellaneous Section of the book at page 148.