Dipping into retirement accounts to pay for law school...

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El_Bee_Oh
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Dipping into retirement accounts to pay for law school...

Postby El_Bee_Oh » Tue Mar 03, 2015 3:38 am

I'll have been working for a few years before starting law school and have been saving pretty aggressively - I'm expecting to have maybe ~$60k in my 401k and ~$30k in my roth IRA by the time I enroll, in addition to a good amount of cash/liquid savings. Once I leave my current job to enroll in law school, I'm planning on rolling my 401k savings into my roth IRA.

I know that you can withdraw from an IRA to pay for education, and in my case, if I use that in addition to my savings, I may be able to avoid taking on any debt whatsoever for law school. On the other hand, since my money will be in a Roth IRA, I'll be able to withdraw tax-free when I retire, which will be worth a lot then. What are y'alls thoughts on using retirement money vs taking out loans to finance law school? It would be awesome to have no debt at graduation, but being able to have a solid savings base for retirement seems like the smart thing to do, and I be I would appreciate that as I get older.

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RCSOB657
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Re: Dipping into retirement accounts to pay for law school...

Postby RCSOB657 » Tue Mar 03, 2015 3:42 am

I think you should direct this question to a wealth building expert not law school people personally. I'd recommend Dave Ramsey, but have only anecdotal information forming that recommendation.

thatsnotmyname
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Re: Dipping into retirement accounts to pay for law school...

Postby thatsnotmyname » Tue Mar 03, 2015 4:37 am

Hey, similar situation here and would like some thoughts on this as well to see if there's anything I haven't considered high-level. Based on my quick research last week it seems you can dip into the IRA for educational expenses for up to $10K one time without penalty. So I wouldn't really be willing to dip into it beyond the $10K as I wouldn't want to be penalized as that makes the prospect of pulling money out of it really unattractive. I don't think that you can pull any money out of your 401K penalty-free to cover your law school expenses, but not 100% sure on that so I'd welcome confirmation/denial from anyone who has done further research on this.

But essentially, I wouldn't take anything out of my retirement accounts beyond what I would not be penalized on which basically limits my options to pulling out $10K from my IRA, if I so choose. I think it would be a bad idea to start taking out money if you're having to pay a penalty tax to do so and in that case the money should definitely be left in the retirement account unless you hit dire straights.

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pylon
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Re: Dipping into retirement accounts to pay for law school...

Postby pylon » Tue Mar 03, 2015 4:42 am

This is an interesting question (and one that I'd be interested in learning more about). You might have more success if you ask in the Ask a Law Student/Graduate forum, as there might be some who have had similar experiences.

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bretby
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Re: Dipping into retirement accounts to pay for law school...

Postby bretby » Tue Mar 03, 2015 5:19 am

thatsnotmyname wrote:Hey, similar situation here and would like some thoughts on this as well to see if there's anything I haven't considered high-level. Based on my quick research last week it seems you can dip into the IRA for educational expenses for up to $10K one time without penalty. So I wouldn't really be willing to dip into it beyond the $10K as I wouldn't want to be penalized as that makes the prospect of pulling money out of it really unattractive. I don't think that you can pull any money out of your 401K penalty-free to cover your law school expenses, but not 100% sure on that so I'd welcome confirmation/denial from anyone who has done further research on this.

But essentially, I wouldn't take anything out of my retirement accounts beyond what I would not be penalized on which basically limits my options to pulling out $10K from my IRA, if I so choose. I think it would be a bad idea to start taking out money if you're having to pay a penalty tax to do so and in that case the money should definitely be left in the retirement account unless you hit dire straights.


In my experience, it usually makes more sense to take out a loan than to take anything out of a Roth. To do the opposite is to be penny wise and pound foolish.

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TheSpanishMain
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Re: Dipping into retirement accounts to pay for law school...

Postby TheSpanishMain » Tue Mar 03, 2015 8:06 am

You sure you want to quit a job that lets you save 90k in two years?

jerseymike
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Re: Dipping into retirement accounts to pay for law school...

Postby jerseymike » Tue Mar 03, 2015 9:09 am

Absolutely do not touch that money. Because of compound interest, you would be losing so much in the long run

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romothesavior
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Re: Dipping into retirement accounts to pay for law school...

Postby romothesavior » Tue Mar 03, 2015 9:12 am

TheSpanishMain wrote:You sure you want to quit a job that lets you save 90k in two years?

My question as well.

NonTradLawHopeful
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Re: Dipping into retirement accounts to pay for law school...

Postby NonTradLawHopeful » Tue Mar 03, 2015 9:19 am

To me there is only one reason to pull from these accounts: retirement. Don't screw your future self over.

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Tiago Splitter
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Re: Dipping into retirement accounts to pay for law school...

Postby Tiago Splitter » Tue Mar 03, 2015 10:18 am

thatsnotmyname wrote:Hey, similar situation here and would like some thoughts on this as well to see if there's anything I haven't considered high-level. Based on my quick research last week it seems you can dip into the IRA for educational expenses for up to $10K one time without penalty. So I wouldn't really be willing to dip into it beyond the $10K as I wouldn't want to be penalized as that makes the prospect of pulling money out of it really unattractive. I don't think that you can pull any money out of your 401K penalty-free to cover your law school expenses, but not 100% sure on that so I'd welcome confirmation/denial from anyone who has done further research on this.

Once you quit your job you can roll your 401k into your IRA and thus receive all of the IRA penalty exceptions. There is no limit on the amount you can use for education; every dollar will be penalty-free. You will pay taxes on the money, and whether you take it out to pay for law school or convert it to a Roth IRA your best bet is to wait until January of your 1L year, as that calendar year is likely to be your lowest income year for some time.

OP, this question has been debated on TLS many times and smart people have come down on both sides. Ultimately the difference your choice will make when you retire is likely to be minimal.

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transferror
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Re: Dipping into retirement accounts to pay for law school...

Postby transferror » Tue Mar 03, 2015 10:27 am

Won't your 401k grow at a faster rate than your debt (assuming 6.8%)? Obviously that's not guaranteed but returns have been great the last few years for everyone I know. I wouldn't touch the 401k unless you absolutely have to.

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Tiago Splitter
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Re: Dipping into retirement accounts to pay for law school...

Postby Tiago Splitter » Tue Mar 03, 2015 10:32 am

transferror wrote:Won't your 401k grow at a faster rate than your debt (assuming 6.8%)? Obviously that's not guaranteed but returns have been great the last few years for everyone I know. I wouldn't touch the 401k unless you absolutely have to.

Don't forget origination fees. There is no investment available to us plebes that comes with a tax-adjusted, risk-adjusted return of 6.8%. Not sure there's one available to the wealthiest either unless Bernie Madoff is behind it.

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Tiago Splitter
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Re: Dipping into retirement accounts to pay for law school...

Postby Tiago Splitter » Tue Mar 03, 2015 10:33 am

TheSpanishMain wrote:You sure you want to quit a job that lets you save 90k in two years?

Fair question but I'm assuming it's more like 4 years given the amounts.

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starry eyed
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Re: Dipping into retirement accounts to pay for law school...

Postby starry eyed » Tue Mar 03, 2015 2:54 pm

Buy a subway instead.

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JohannDeMann
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Re: Dipping into retirement accounts to pay for law school...

Postby JohannDeMann » Tue Mar 03, 2015 3:18 pm

romothesavior wrote:
TheSpanishMain wrote:You sure you want to quit a job that lets you save 90k in two years?

My question as well.

arewevoting
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Re: Dipping into retirement accounts to pay for law school...

Postby arewevoting » Tue Mar 03, 2015 3:22 pm

JohannDeMann wrote:
romothesavior wrote:
TheSpanishMain wrote:You sure you want to quit a job that lets you save 90k in two years?

My question as well.


what job do you have and where can i get it... i clicked on this forum because i too have a roth ira i'll likely have to withdraw from, but i have 3,700 in it over the course of two years....

stt1
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Re: Dipping into retirement accounts to pay for law school...

Postby stt1 » Tue Mar 03, 2015 5:36 pm

Tiago Splitter wrote:
transferror wrote:Won't your 401k grow at a faster rate than your debt (assuming 6.8%)? Obviously that's not guaranteed but returns have been great the last few years for everyone I know. I wouldn't touch the 401k unless you absolutely have to.

Don't forget origination fees. There is no investment available to us plebes that comes with a tax-adjusted, risk-adjusted return of 6.8%. Not sure there's one available to the wealthiest either unless Bernie Madoff is behind it.


The direct comparison between risk adjusted returns isn't an accurate way to decide this (not that you were necessarily suggesting that, but in case anyone misunderstood your post).

The reason is that the investment advantage of your IRA or 401k over a traditional investment account is going to last 40 years or so to work, while the loans are going to be repaid over 10 years or so (or whatever your timetable is). So even if the risk adjusted return of having less loans is better than the IRA 401k during repayment, the IRA 401k tax advantage would have had another 30 years to make up and surpass that.

You could of course run some calculations and do a comparison over the longer timetable (using whatever you expect your repayment and retirement length), but given the kind of likely timetables we are talking about, I don't think reducing loans stands any real chance against keeping the IRA 401k. The exception would be if you run the comparison assuming an extreme risk aversion and very low returns in your default investment, then the reducing loans will have a chance, but in that case your investment attitude is questionable for a young person far away from retirement.

The above reasoning of course wouldn't be true if you were allowed to repay money you took out of your IRA 401k later, then you could enjoy the better risk adjusted returns during the short term repayment period from having less loans, while preserving the tax advantage of the retirement accounts over the long term. Sadly, you generally can't do that for an IRA, but there are some rules allowing loans of I think 5 years from 401ks, I think up to half the value, which approximates that situation. Provided I am right about that, I would recommend:

Borrow the maximum amount allowable from your 401k so as to take less out in the higher interest loans. Do not take any distributions from either your IRA or 401k however, as the tax advantage over the very long term to retirement will likely be much more valuable than anything you save in risk adjusted returns over repayment of loans. Then, understand that you will have a little tighter loan repayment burden in the 2 years after graduation, because of the 401k loan, and prepare accordingly.

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Tiago Splitter
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Re: Dipping into retirement accounts to pay for law school...

Postby Tiago Splitter » Tue Mar 03, 2015 5:45 pm

I'll confess to cheating a little with my obviously over simplistic characterization. FWIW others have done the calculations and the final total at retirement will come out pretty close in either case, in part because you have to assume you either 1) take loans and skip some IRA/401k contributions post-retirement or 2) withdraw now but save extra in a taxable account while your parallel universe counterpart is paying off his loans and "only" maxing out retirement contributions. Ultimately most people won't max out their IRA and 401k anyway and with an amount like the OP is talking about a little frugality will probably make up for whatever path he takes, should it be the wrong one.

Also you can borrow 50% of a 401k only up to $50,000. If OP goes that route and the brokerage firm allows him to decide his own interest rate (as some do) then he should counter-intuitively charge himself the highest one they'll allow. It always cracked me up when people wanted to know how cheap they could get off when the 401k loan is a scam the IRS lets you run on it to get more than the maximum contribution into the account.

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rpupkin
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Re: Dipping into retirement accounts to pay for law school...

Postby rpupkin » Tue Mar 03, 2015 6:15 pm

NonTradLawHopeful wrote:To me there is only one reason to pull from these accounts: retirement. Don't screw your future self over.

I don't get this logic. Having large interest payments also "screws your future self" and, of course, reduces what you can pay into retirement when you have a job.

As others have suggested, a benefit of saving your IRA until retirement is that (a) you don't have to pay penalties on it, and (b) you don't have to pay taxes on it. But the same is true when one is in law school. There's no penalty for educational expenses, and OP's income will be so low that there should be no taxes on, say, a $15K distribution. (If OP has significant sources of income during law school, then this issue looks different.)

legends159
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Re: Dipping into retirement accounts to pay for law school...

Postby legends159 » Tue Mar 03, 2015 7:07 pm

I agree the difference is probably negligible since it's only $90K we're talk about which should be a drop in the bucket if you're saving correctly for retirement but I would argue for not using your retirement funds.

The reason is that it will take about 4-5 years to get your 401K/Roth back to $90K and you can actually pay back the ~$110K (3 years compounding interest) in less than 4-5 years assuming you do biglaw (quicker still if you do biglaw your 1L/2L summer).

Even with all else being equal, the fact that you have law school debt will (1) make biglaw more bearable as you see the end goal in mind and (2) will incentivize you to save.

Of course if you think the market will tank in the next few years - then it would be a great investment decision to liquidate your retirement fund to pay for law school.

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lacrossebrother
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Re: Dipping into retirement accounts to pay for law school...

Postby lacrossebrother » Tue Mar 03, 2015 7:13 pm

legends159 wrote:Of course if you think the market will tank in the next few years - then it would be a great investment decision to liquidate your retirement fund to pay for law school.

Why? If that happens, and you didn't liquidate the 401k, you could do it at that point. OK, you lose like $3k in loan fees, but whatever.

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rpupkin
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Re: Dipping into retirement accounts to pay for law school...

Postby rpupkin » Tue Mar 03, 2015 7:15 pm

legends159 wrote:Even with all else being equal, the fact that you have law school debt will (1) make biglaw more bearable as you see the end goal in mind and (2) will incentivize you to save.

I think you have this backwards. Based on my own experience, as well as the experience of others in big law, having law school debt makes biglaw significantly less bearable. It's a lot easier to stand the dysfunction if you know that you can walk away at anytime.

legends159 wrote:Of course if you think the market will tank in the next few years - then it would be a great investment decision to liquidate your retirement fund to pay for law school.

That's the thing--if long term trends hold, then the market is going to outperform the 6-8%/yr the OP will gain by avoiding law school debt. But there is, of course, some risk in counting on the market to perform at historical averages.

In avoiding debt now, the OP is effectively getting a guaranteed 6.8% return relative to the alternative. That's hard to get.

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lacrossebrother
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Re: Dipping into retirement accounts to pay for law school...

Postby lacrossebrother » Tue Mar 03, 2015 7:23 pm

Also you get to write off $2500 off of educational interest while in law school (and beyond if you don't get phased out) so the fees would be whatever

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lacrossebrother
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Re: Dipping into retirement accounts to pay for law school...

Postby lacrossebrother » Tue Mar 03, 2015 7:25 pm

Also do whatever it takes to get a perkins loan at some point

NonTradLawHopeful
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Re: Dipping into retirement accounts to pay for law school...

Postby NonTradLawHopeful » Tue Mar 03, 2015 7:46 pm

rpupkin wrote:
NonTradLawHopeful wrote:To me there is only one reason to pull from these accounts: retirement. Don't screw your future self over.

I don't get this logic. Having large interest payments also "screws your future self" and, of course, reduces what you can pay into retirement when you have a job.

As others have suggested, a benefit of saving your IRA until retirement is that (a) you don't have to pay penalties on it, and (b) you don't have to pay taxes on it. But the same is true when one is in law school. There's no penalty for educational expenses, and OP's income will be so low that there should be no taxes on, say, a $15K distribution. (If OP has significant sources of income during law school, then this issue looks different.)


I would always advise against withdrawing retirement unless it is life and death. The compounding interest is wiped out, along with the aforementioned penalties and taxes.

If OP uses the 90k he graduated debt free and with zero retirement. If he takes out the 90k in loans he pays that back while the retirement funds accrue a higher return then he pays interest on the loans. By the time the loans are paid off he continues paying retirement with over 6 figures already there.

Also, once you justify withdrawing from retirement, it is easier to justify the decision in the future. Just leave alone until you are 65+ to avoid temptation and yes, screw your future self.




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