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Image source: Getty Images. Join Stock Advisor Discounted offers are only available to new members. You cannot borrow from an IRA. Also, although federal law permits borrowing from a plan, it is common for plans to be more restrictive and not permit borrowing from the plan.
There are several low-cost Federal education loan programs available, such as the Stafford loan for students and the PLUS loan for parents. You are better off borrowing from one of these programs than from your retirement plan, since the interest on the education loans will likely be less than the lost earnings on your retirement plan. In addition to low interest rates, the Federal education loans also have longer and more flexible repayment terms, partial tax deductibility, deferments and forbearances.
Another alternative is to get a home-equity loan if you own your home. Not only do home equity loans offer low interest rates, but the interest may be deductible on your income taxes.
You can make a hardship withdrawal from your k to pay for college tuition and related expenses including room and board for yourself, your spouse, your dependents, and children including children who are no longer dependents.
The withdrawal must be to pay for the educational expenses and you must have no other way to pay for the expenses. You must have also have already obtained any distribution or loans available to you under the k plan.
However, the withdrawals will be subject to income tax. You will also be precluded from contributing to the k plan for the six months following the withdrawal. It can also be used for vocational and trade schools. However, many states do offer tax deductions or credits for contributions. In addition, the contribution limits can be higher for plans than they would be for an IRA. The plan can also be a useful vehicle for extended family to help pay for college.
Young, a certified financial planner at RMB Capital. Those are the biggest positives of such plans, but plans also offer an advantage over the Roth IRA, especially for parents who are on the younger side. But plans have some downsides, too. Perhaps the most obvious is their inflexibility. But there are alternative ways to use the funds without incurring taxes or penalties: change the beneficiary to a sibling or other family member, pay for your own ongoing education or save the money for a grandchild, among other options.
So savers contribute after-tax money today in order to get a tax break tomorrow. The Roth IRA also offers benefits in terms of available investments, unlike the , where investment choice is limited to funds that may not offer low-expense options.
He sees older investors converting some of their traditional IRA assets to a Roth IRA, though they spread out the conversion over years in order to minimize the tax bite of conversion.
So each account is best-suited to its intended purpose. Depleting these assets early can potentially reduce retirement security for some families and take away a valuable wealth-transfer tool for others who have multi-generational financial planning goals. How We Make Money. Editorial disclosure. James Royal. Written by. Bankrate senior reporter James F. Royal, Ph. Edited By Brian Beers.
Edited by. Brian Beers. Brian Beers is the senior wealth editor at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money.
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