401(k) plans are retirement plans and under section 401(k) of the Internal Revenue Code, the federal government created special tax advantages for contributions to these plans and earnings generated from these plans.

An Individual Retirement Account (IRA) is a retirement account with tax advantages that you establish independent of an employer. There are different types of IRA accounts, and individuals may contribute money annually based on how much they've earned or up to IRS-established limits, some of which are age- and income-related.

Parents contemplating withdrawing 401(k) or IRA funds to cover education costs should consider the following:

• Interest rate. Not applicable.
• Fees. Not applicable.
• Credit eligibility. Not applicable.
• Tax considerations. Even if you are at the retirement age of 59½, any withdrawn funds, regardless of amount, will be subject to an income tax rate according to your tax bracket and current tax rates.
• Withdrawal amount. Limited to the amount of total vested contributions in your fund.
• Withdrawing for all your children. Many parents don't have enough money vested to cover 4 years of tuition for all of their children.
• Withdrawing for school-related expenses. Can finance expenses in excess of cost of attendance, although withdrawals for expenses in excess of tuition, books, fees, supplies, and special equipment may be subject to additional taxes.
• Deferment and forbearance clauses. Not applicable.
• Repayment. Not applicable.
• Repayment plan options. Not applicable.
• Liquidity, emergencies, and other expenses. Once you withdraw 401(k) or IRA funds, you will no longer have these funds available to finance emergencies or other expenses.
• Lost retirement income and interest. Once funds are withdrawn, you will not have these funds and the interest income available later in life when you need them for retirement income.

For more information, consult your financial adviser.

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