Dear Harry: I am thinking of making withdrawals from my 401(k) plan to pay for my son's tuition. My husband and I make a good living, but somehow we were unable to save enough to pay for school. Please don't tell me that we're living above our means. We have to keep up appearances because of my husband's position. That goes for our home and our cars. We are looking into the possibility of loans, too. Financial aid in the form of grants is out of the question because of our income. We are both 51 years old. Is the withdrawal the best way to go?
What Harry says: The answer is an unequivocal NO! You will have to pay the tax on the withdrawal as well as a 10 percent penalty for early withdrawal. However, your 401(k) or your husband's plan may offer the possibility of borrowing against the principal. This loan could be at a lower rate than you could get on a student loan. There are restrictions (such as a five-year payback) on these loans. Make a careful comparison between the money offered by the college and the 401(k) loan. And keep in mind that there are tax credits available for payment of college tuitions which will reduce your out-of-pocket cost.
And one side note for everyone who tries to keep up appearances or keep up with the Joneses: These actions cause more financial problems than almost any other.