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    Jim McDaniels's Avatar
    Jim McDaniels Posts: 1, Reputation: 1
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    #1

    Nov 19, 2014, 11:54 AM
    IRS Rule for 401 K Withdrawals
    Help to pay Grandson college expense. Is there no penalty up to $10,000.00 ? On a one time per year withdrawal.
    ebaines's Avatar
    ebaines Posts: 12,131, Reputation: 1307
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    #2

    Nov 19, 2014, 12:01 PM
    You will pay a 10% penalty on this withdrawal, assuming you are under 59-1/2 years of age, as well as income tax. Needing the funds to pay tuition for yourself, your spouse, your dependent, or your child is considered a "hardship," and under IRS rules your employers 401(k) plan must make money available to you, up to $10K. But being a "hardship" does not mean that it's penalty free.

    Note also that paying tuition for a grandchild does not fall into the "hardship" definition unless he's your dependent, so if he's not your dependent it's likely that the plan administrator will deny your request. My advice is forget the withdrawal and take a loan on your 401(k) instead - there's no interest or penalties or taxes, so it's a better deal.
    AtlantaTaxExpert's Avatar
    AtlantaTaxExpert Posts: 21,836, Reputation: 846
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    #3

    Nov 20, 2014, 08:34 PM
    Another option is to roll part of your 401(k) into a rollover IRA, then make the withdrawal from the IRA to pay college tuition.

    Payment of college tuition for yourself, your spouse, your children or grandchildren is one of the exceptions that allows you to NOT pay the 10% Early Withdrawal Penalty.
    ScottGem's Avatar
    ScottGem Posts: 64,966, Reputation: 6056
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    #4

    Nov 21, 2014, 10:54 AM
    There IS interest on a 401(k) loan, but its interest you pay yourself so the net affect is no interest.
    AtlantaTaxExpert's Avatar
    AtlantaTaxExpert Posts: 21,836, Reputation: 846
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    #5

    Nov 23, 2014, 10:02 AM
    The exception I cited is for IRAs only, which is why the rollover is required.
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