Employer-Sponsored Plan Withdrawals Most employer plans allow loans (up to a maximum of $50,000) but limit the amount to 50% of the participant’s vested assets. If you choose this option, youmust repay the loan (generally, over a five-year period), but you would be paying the interest to yourself, not a financial institution. One caveat: If you lose your job, youmay have to repay the loan immediately. If you are participating in a tax-deferred retirement plan — such as an IRA or an employer-sponsored plan — you could use some of these funds to help pay for college. However, if you choose to use retirement funds, you would be reducing the money that will be available in retirement. There are many ways to fund a college education, but there are no scholarships for retirement! Using Funds from Tax-Deferred Retirement Plans Generally, withdrawals from traditional IRAs andmost employer-sponsored retirement plans are taxed as ordinary income. Distributions taken prior to age 59½ may be subject to a 10% federal income tax penalty (with some exceptions, such as the IRA higher-education exception described). IRA Withdrawals IRAwithdrawals used for qualified higher-education expenses (such as tuition, fees, and supplies) are not subject to the normal 10% federal income tax penalty that applies to early distributions before age 59½. This money can be used not only for your children’s higher-education needs but also for those of yourself, your spouse, and your grandchildren. Even so, all withdrawals of tax-deferred assets are taxable as ordinary income. If you have a Roth IRA, regular contributions (but not earnings) can be withdrawn at any time, for any reason, without any income tax liability or early-withdrawal penalty. For a qualified tax-free and penalty-free withdrawal of Roth IRA earnings, distributions must meet the five-year holding requirement and take place after age 59½ (with some exceptions, such as the IRA higher-education exception described).
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