Can you withdraw from a 401k to pay for college?

Question: Can I withdraw from my 401k to help pay for my college tuition without having to pay the early withdrawal penalty?

I have been working for a few years before going going back to school to pursue my MBA. I am thinking of withdrawing funds from my 401k in order to help me pay for my education expenses. However, I’m worried that I may have to pay the penalty in addition to taxes. If I withdraw from my 401k to pay for my education, will I be hit with a penalty?

Answer:

If you leave your current job before pursuing your degree, you have the ability to rollover your 401k into an IRA. Once the funds are in an IRA, you can use the proceeds for “qualified higher education expenses.” Of course your will have to pay regular income tax, but you will not be hit with the early withdrawal penalty.

If you expect your income to be less while you’re a student, then it’s probably worth it to take a deduction now and pay regular income tax on the withdrawal while you are in a lower tax bracket.

According to IRA Publication 970 (Page 52), you can withdraw from your IRA without the penalty if you use the proceeds for qualified higher education expenses in the year that you make the withdrawal. Keep in mind that the only way to accomplish a rollover to an IRA is by leaving your current employment though.

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