Normally, any money you invest in a 401(k) stays there a long while. The minimum age for withdrawing from a 401(k) without a tax penalty is 59 1/2 years. If you're any younger, you can't tap it, except in special hardship cases, such as when you need the money for college tuition for yourself, your spouse or your dependents.
The law doesn't require 401(k) plans to offer hardship withdrawals, so ask your plan administrator if it's an option. If your plan allows withdrawals, you can take out money for tuition, room and board and related educational expenses and fees. You can't touch the interest your accounts have earned, only your contributions and -- if your plan allows it -- matching employer contributions. Once you take the money out, it becomes taxable income for the year you withdraw it.
To claim a hardship withdrawal, you have to prove a hardship. If you have money in the bank that can cover your college bills, or investments you can liquidate to pay tuition, the IRS does not consider you a hard-luck case. You must exhaust all your other resources before you tap the 401(k). The IRS says you have to prove to the plan administrator that you need the money. Fortunately, a hardship withdrawal isn't like a mortgage: The company doesn't have to verify everything you say unless it suspects you're lying.
When you tap your 401(k) for college, it's going to cost you. For starters, the money you draw out is no longer earning tax-free interest, which cuts how much the account earns for your retirement. You can't replace the money easily because you can't deposit anything into the account for six months after a withdrawal -- so you're also out six months of the company's matching contributions. In addition to the regular income tax on the withdrawal, you have to pay a 10 percent tax penalty.
If a hardship withdrawal would push you up into a higher tax bracket, one alternative is a 401(k) loan. If your plan allows you to borrow from the account, you can take up to 50 percent out to pay for college. As you have to repay it eventually, you don't pay taxes on the loan amount, and the interest on the money goes back into the 401(k). If you quit or switch to a different employer, however, you may have to pay the loan back immediately.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.