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Using IRA for college tab?
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June 8, 2000: 11:55 a.m. ET
Consider using investing dollars before dipping into your retirement plans
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NEW YORK (CNNfn) - If you're facing four years of tuition bills now that your child is heading off to college in the fall, you may be debating whether you should dip into your stock portfolio, your IRA or your 401(k).
In response to a reader's question, Heather Locus, a certified financial planner from Schaumburg, Ill., and a member of the Financial Planning Association, said it may be wise to look at your investing portfolio first.
Ask the expert a question.
I have to pay for my daughter's college education, and I'd like to know if I should pay for it with money from my investment portfolio, my traditional IRA or borrow from my 401(k). What do you think?
In general, it is probably best to take the withdrawals from your investment portfolio.
A withdrawal from your IRA would not be subject to an additional 10 percent penalty if used for qualified higher education costs, which are defined primarily as tuition and books.
However, if you deducted all of your contributions, the full amount of your withdrawal would be subject to federal income tax and potentially state income tax, depending on where you reside. This also could affect your daughter's eligibility for student aid in future years. The government expects parents to contribute a portion of their income, so higher income on your tax return results in a higher expected contribution from you.
The government also expects parents to contribute a percentage of their non-retirement assets toward their children's college, but do not expect a percentage of their IRA and retirement accounts. Therefore, spending your investment portfolio first also will help with this calculation if your daughter applies for aid.
While the 401(k) loan is probably a better option than the IRA withdrawal, I wouldn't recommend it. Besides the fact that you most likely will need those assets for your retirement, there are a number of restrictions on taking a plan loan.
First, it must be allowed by your specific plan; just because the IRS allows it does not mean it is a provision in your company's plan document.
Additionally, if you leave the company you must repay the balance before your termination date or it is considered a taxable distribution. You also must repay the loan within 5 years in at least quarterly installments and the maximum loan is the lesser of $50,000 or one-half of your account balance if greater than $20,000.
If your account balance is less than $20,000, the IRS allows you to borrow $10,000. By taking the loan you will earn the interest you are paying, but you are giving up the potential investment earnings of funds you were invested in.
If your investment portfolio is not enough, you may check into having your daughter take out a loan. With the changes passed in the Taxpayer Relief Act of 1997, there is a reasonable chance your daughter could deduct the interest on the loan when she begins repayments after graduation. Good Luck! 
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