401(k) hardship tuition rules

[techvette]

At the end of my last semester of school (ended May 08), the university decided to cancel my scholarship for the previous semester (hooray for lack of notice) leaving me holding the bag for approximately $10,000 of expenses owed directly to the university, not paid for by student loans.

I was hoping to pay that off with a bonus from my employer last year but the state of the economy has kept that from happening. I know that a 401(k) hardship withdrawal can be used to pay tuition expenses - but can it be used to pay them *after* you graduate? The school will happily provide me with a current bill.

Not that this is *not* a student loan - it's just a bill that hasn't been paid that's accruing late fees that are *not* cheap.

Help!

[disneysteve]

From finaid.org:

Hardship Withdrawals from Your Retirement Plan

You can make a hardship withdrawal from your 401(k) to pay for college tuition and related expenses (including room and board) for yourself, your spouse, your dependents, and children (including children who are no longer dependents). The withdrawal must be to pay for the educational expenses and you must have no other way to pay for the expenses. You must have also have already obtained any distribution or loans available to you under the 401(k) plan. However, the withdrawals will be subject to income tax. If you are not at least 59-1/2 years old, there will also be a 10% early withdrawal penalty. You will also be precluded from contributing to the 401(k) plan for the six months following the withdrawal.

I think this is a really, really bad idea, though I generally think that taking money out of a retirement plan for any reason other than retirement is a bad idea.

A 401k loan would be preferable (though I don't like those either). That way, you don't pay income tax and a 10% penalty on the money. Based on this text, you can't do a hardship withdrawal unless you have already taken a loan anyway.

Keep in mind that with a withdrawal, because of taxes and penalty, you'd actually need to cash out about $15,400 to be left with $10,000. Then you wouldn't be able to contribute for 6 months. This would put a huge dent in your retirement savings. I'd be looking for any possible source of money rather than the 401k withdrawal.

[techvette]

Hmmm...

Unfortunately, I took the only available loan from my acct last year to pay for the down payment on my house. I'm aware of the penalties and taxes, but the late fees on the tuition are killing me to the tune of $1k/year - which means I'm making no forward progress on paying down the debt - and the school is getting ready to turn the account over to collections. I think in this case I'd be willing to take the hit if the rules allow it. Do they?