Even though federal stipulations state that you cannot access the money in your 401k plan before you reach the age of 59 1/2, it is possible under certain circumstances to use your 401k money to pay for school. Individuals facing difficult financial situations qualify for emergency access to their 401k funds.
Instructions
1. Approach your employer about a 401k loan program if you plan to continue working while you go to school. The terms of an employer-sponsored 401k loan are much more advantageous than taking the money directly out of your 401k account. Often, employer loan programs charge an interest rate on a 401k loan that is roughly equal to the interest rate the money is invested at while in your retirement account.
2. Be prepared to offer proof that you have no alternative way to pay for school other than taking money out of your 401k plan. 401k accounts are set up to be difficult to access before you reach retirement age.
3. Review the terms and conditions under which you are allowed to access your 401k money by asking your account administrator to provide you with your 401k's Summary Plan Description (SPD). Get clarification from the administrator or a financial professional if there are items contained in the SPD you don't understand.
4. Pay the taxes and penalties, as set forth by the IRS, for taking money out of your 401k early, if you qualify to do so and cannot secure a 401k loan from your employer. The standard fees break down like this: you will pay income tax on the amount of money you take out of your 401k as though it were normal earned income, and you are also subject to a 10 percent penalty on top of the amount you access. Thus, taking $10,000 at a 25 percent tax rate would leave you with $6,500 after the 10 percent penalty is applied.
5. Pay your tuition with the money you were loaned or advanced from your 401k plan. You should save any receipts you get to prove the money you borrowed was in fact spent on educational expenses.
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