If you have a 401k...

[BlueDiamond]

read the thread title and would have bet money that this was MTal posting this article and telling us all that the world will be ending soon

http://thecaucus.blogs.nytimes.com/2011 ... -scenario/

[jarak01]

But is it worth it if you have to pay the tax to withdraw from the 401k? Isn't there a way to rollover from a 401k to an IRA without paying a penalty?

The idea is that with the tax credits/deductions for paying for school, and the lack of significant income during your 1L summer, your tax liability for 2012 (if you were to start school this fall) is very low. Therefore, you're not paying significant tax on the distribution as long as you take it after 1/1/2012. You are, however, still giving up the compounding interest on your pre-tax money that you put in the 401k. That's the tradeoff for taking the money now. You also have to pay taxes on any earnings in the 401k (at a capital gains rate, I believe).

The rollover of a 401k to an IRA happens when you quit your current job (or soon after), and takes place penalty-free. This is independent of taking the money out to pay for school or not.

edit: Also, if you have enough to cover multiple years of school, the prudent course would be to take multiple distributions across the different years so your AGI each year stays relatively low and therefore so does your tax rate.

[schooner]

But is it worth it if you have to pay the tax to withdraw from the 401k? Isn't there a way to rollover from a 401k to an IRA without paying a penalty?

The idea is that with the tax credits/deductions for paying for school, and the lack of significant income during your 1L summer, your tax liability for 2012 (if you were to start school this fall) is very low. Therefore, you're not paying significant tax on the distribution as long as you take it after 1/1/2012. You are, however, still giving up the compounding interest on your pre-tax money that you put in the 401k. That's the tradeoff for taking the money now. You also have to pay taxes on any earnings in the 401k (at a capital gains rate, I believe).

The rollover of a 401k to an IRA happens when you quit your current job (or soon after), and takes place penalty-free. This is independent of taking the money out to pay for school or not.

edit: Also, if you have enough to cover multiple years of school, the prudent course would be to take multiple distributions across the different years so your AGI each year stays relatively low and therefore so does your tax rate.

This is clear and very helpful. Thanks!