Most people have a 401K. Have you ever been tempted to use it to pay for things like your child’s college education? This is seldom a good idea!
- Taxes are owed on the amount you take out for both federal and state (if applicable).
- If you are under 59 ½ years old there is a 10% penalty on top of the taxes owed. For example, $10K, $1K penalty.
- Taking a loan on your 401K. You have to pay yourself back and you have to watch out for the fees but it may be a worthwhile alternative. Plan to be with your employer until the loan is paid off or you will owe taxes and the 10% penalty if you don’t pay back the loan.
- Tapping into your IRA. The IRS allows you to take money from your traditional IRA for qualified higher education expenses and not have to pay the 10% penalty. You will owe taxes but not the penalty.
Think before you tax money out of your 401K. Weigh the alternatives and if you have questions give me a call.