College Tuition, Help!

I have a daughter that just started college this semester. I have a small 401K and took money from there to pay for her first semester approx. 7,500. It is coming time to pay the summer installment and I have only half the amount I need. Should I once again take money from my 401K or should I do a loan? What should I do. By the way, although I am married my husband is currently unemployed. Thanks for your advice.

Hi Bettie,

The answer to your question is based on a few things. Most importantly it depends on how comfortable you are with withdrawing a significant amount of money from your retirement plan as it can affect your investment goals for your retirement and can be more costly than what appears on the surface.

Usually the best way to treat your retirement plan is to ignore it until you're 59 1/2. However, this is increasingly becoming more difficult to do. When you must seriously consider using those funds, first compare rates of interest for the other sources of funding. If the rates are close, you might be better off going the route of obtaining funding from an outside source (Stafford, PLUS, etc.). If you've decided that you're going to tap your funds, it would be better to take a loan for educational expenses than to simply withdraw the funds. If you withdraw the funds, you will be subject to income tax on the amount requested plus a 10% penalty. The IRS designed that plan for retirement purposes and imposes a penalty to discourage early withdrawal (they probably believe that Social Security won't be enough to cover you through retirement).

So, while I don't know all of your circumstances involved, I'd still lean toward taking it out as a loan. There's just entirely too much to lose by withdrawing it.

I wish your daughter the best of luck with her studies.