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Is there a way to take a 401k payment prior to age 59.5 and use the funds to pay for higher education for adult children over age 27 without being penalized the 10%.

My adult kids are going back to school, I want to help but am not 59.5 years old. Will I still have to pay the 10% penalty if funds used for tuition etc. They are both over 27 years old.

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dmertz
Level 15

Is there a way to take a 401k payment prior to age 59.5 and use the funds to pay for higher education for adult children over age 27 without being penalized the 10%.

Using the distribution for higher-education expenses is not an exception for the early-distribution penalty on a distribution from a 401(k).  To be able to use the higher-education-expense exception to the the 10% early-distribution penalty you would first have to roll the money from the 401(k) over to a traditional IRA, then take the distribution from the IRA.  The penalty exception can then be used on the amount of the distribution up to the amount of your children's qualified higher-education expenses that you pay during the year in which you receive the distribution from the IRA.  (Your children are not required to be your dependents.)

To be able to roll the money from the 401(k) to an IRA, the distribution from the 401(k) must be permitted.  If you still work for the company that provides the 401(k) plan, it's unlikely that you will be permitted to do the rollover.

You must be able to document that you were the one who paid the expenses.

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3 Replies
dmertz
Level 15

Is there a way to take a 401k payment prior to age 59.5 and use the funds to pay for higher education for adult children over age 27 without being penalized the 10%.

Using the distribution for higher-education expenses is not an exception for the early-distribution penalty on a distribution from a 401(k).  To be able to use the higher-education-expense exception to the the 10% early-distribution penalty you would first have to roll the money from the 401(k) over to a traditional IRA, then take the distribution from the IRA.  The penalty exception can then be used on the amount of the distribution up to the amount of your children's qualified higher-education expenses that you pay during the year in which you receive the distribution from the IRA.  (Your children are not required to be your dependents.)

To be able to roll the money from the 401(k) to an IRA, the distribution from the 401(k) must be permitted.  If you still work for the company that provides the 401(k) plan, it's unlikely that you will be permitted to do the rollover.

You must be able to document that you were the one who paid the expenses.

Is there a way to take a 401k payment prior to age 59.5 and use the funds to pay for higher education for adult children over age 27 without being penalized the 10%.

Sorry ... to avoid the penalty you need to pay for a dependent's education. 

Is there a way to take a 401k payment prior to age 59.5 and use the funds to pay for higher education for adult children over age 27 without being penalized the 10%.

Does that mean I have to pay DIRECTLY to the institution and they will then provide a tax form stating such?
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