Accessing Money from Employer-Sponsored Retirement Plan

As the name suggests, an employer-sponsored retirement plan is a plan that an employer sets up and maintains for its employees' retirement. A qualified retirement plan is an employer-sponsored retirement plan that receives special tax treatment under federal law. 401(k) plans and profit-sharing plans are common examples of qualified employer-sponsored retirement plans.) The tax benefits of a qualified plan generally include pretax contributions and tax-deferred growth of investment earnings. In return for such benefits, qualified plans generally must comply with specific federal rules set forth under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC).

If your employer offers a qualified retirement plan and you have money in the plan, this may be a source of funds for college expenses. However, most financial professionals recommend tapping retirement accounts for college expenses only as a last resort.

How do you access the money in your employer-sponsored retirement plan?

There are two possible ways to access funds in your employer retirement plan: borrowing or withdrawing. However, not all employer plans may allow borrowing.

Plan loans

Some employer-sponsored plans allow you to borrow against the funds in your plan, as long as you have a vested balance in the plan. The amount of the loan you can take is generally limited to the lesser of $50,000 or one-half of your vested plan benefits. The advantage of plan loans is that they are not taxed or penalized like withdrawals, as long as the loan is repaid on time. Also, the interest rate is usually reasonable (e.g., one or two points above the prime rate), and the interest you pay is credited to your own plan account.

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