Posted on February 16, 2006 at 16:49:05:
Yes, you can tap your IRA to pay college tuition costs, though it may not be the best idea. There’s no penalty for those under 59 ½, though taxes are due on the money. Many expenses can be covered, like higher-education tuition, course books, and the cost of room and board, as long as the student is carrying at least 50 percent of the normal course load. However, computers are not covered, unless the student is required to have one. The downside: the parent is limiting his own retirement nest egg. Note that financial aid and loans are available for college, but not for retirement.
A 401(k) cannot be uses without penalty, but many plans permit borrowing up to 50 percent of the account balance. Interest is credited back to the account. Because it’s a loan, not a distribution, there is no penalty or tax due – as long as the loan is repaid in equal installments over five years. If the money is not repaid in time, though, both taxes and penalty are due.