401K Rollover Money Used to Pay for College

401K rollover funds can help adults returning to college pay tuition.
401K rollover funds can help adults returning to college pay tuition.

401K rollover money used to pay for college comes with some penalties. The 401k is a retirement fund and typically when you rollover from one 401k you are putting it into a different 401k. If you withdraw early and don't roll the cash over, you could be facing tax penalties.

About 401K Rollover Money Used to Pay for College

The most common 401K rollover scenario is to withdraw your 401K funds from one plan and deposit them in another, usually when you change jobs. Most first time college students aren't thinking about a retirement plan, but for adults returning to college in their 30s, 40s and 50s, 401k rollover money used to pay for college may be an option.

However, if you withdraw from a 401K plan before it matures, you can face severe tax penalties. For example, if you have 200,000 dollars in a 401k and you withdraw it, you will pay 20% or more in tax penalties. If you are considering withdrawing from your 401k early by rolling it over and not depositing it in a new 401k, do your tax homework.

Understanding the Definition

Prior to planning a 401K rollover to pay for your college tuition, you need to understand that the IRS identifies stocks, bonds, mutual funds and any qualified employer's contributions as a retirement or traditional IRA plan. There is a pre-determined age when a person can access a 401K, and the IRS defines it as 59 and a half years old. They allow rollovers to new plans without penalty because the funds contributed are done so without taxation. This is why the penalties for withdrawing early are so expensive.

The rising cost of college tuition, the ever-changing marketplace and the need to continuously develop marketable skills, make 401K rollover money used to pay for college an attractive option. The simple fact is the average adult no longer stays with the same company or career for the entirety of his or her employment life span. Statistics indicate that employees will rollover their 401Ks at least three times as they change jobs and that one in six will withdraw early and pay the penalties, particularly in tight economic times.

Covering Tuition Costs

If you're considering going back to school and you're worried about tuition costs, a 401K rollover should be a last resort option. Rolling over your 401K to a traditional IRA protects your retirement and leaves you with a cushion for future needs. Scholarships, loans and other financial aid options should be exhausted prior to withdrawing funds from your 401K.

Some portions of college tuition are tax deductible. Multiple scholarships are available for adults returning to college. Possibilities include program for moms returning to college and teachers expanding their educational opportunities. Some employers even subsidize tuition costs. Any and all of these options should be exhausted before you look at borrowing from your own future to pay for the present.

Additional Resources

Learn more about 401K rollovers:

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401K Rollover Money Used to Pay for College