Amounts in 401(k) plans are designed for retirement savings. However, they can be tapped for an immediate and heavy financial need. There are certain situations that clearly fit this bill, such as facing foreclosure on a home or funeral costs. When it comes to education, a hardship distribution can be taken to pay tuition, related educational fees, and room and board expenses, for up to the next 12 months of post-secondary education.
The IRS has indicated informally that tapping a 401(k) to pay off a child’s college loans does not constitute a financial hardship (INFO 2018-0001). (An information letter provides general statements of well-defined law without applying them to a specific set of facts.) A parent who wants to pay off a child’s student loans may be able to do so by borrowing from the plan, assuming the plan permits loans and the parent’s account balance is sufficient. A plan loan must bear a reasonable rate of interest and be repaid ratably over no more than five years.
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