Dipping into retirement accounts 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 7:47 pm

You guys get that interest compounds on student loans too right? The word compound has no business in this discussion

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

Postby abl » Tue Mar 03, 2015 7:53 pm

Assuming that the compounding interest / tax / whatever advantages end up being pretty equivalent, I'd strongly recommend taking out the loans (albeit trying to still borrow as little as possible).

Why? Many reasons, some of which are psychological. But on top of them, there's inherent value to liquidity--which you give up by cashing out on your retirement savings (which can be used for a down payment on your house, if I recall correctly).

I see two primary psychological benefits of keeping your retirement: (1) I suspect you will find it more difficult to save for retirement (a discretionary expense) than to pay off your loans (a non-discretionary expense); and (2) having greater debt is more likely to encourage you to be frugal going forward than having less in retirement will.

The main countervailing factor I can think of off the top of my head is whether you think that having a lot of debt is potentially going to push you towards sub-optimal employment outcomes--e.g., you'll take a miserable 160k job instead of an enjoyable 100k job (I think a lot of law students are driven to biglaw by their debt, rather than because biglaw is really all that amazing).

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

Postby albpert » Tue Mar 03, 2015 8:08 pm

Am I missing something? Isn't the only question whether you value a guaranteed 6.8% return by avoiding loans v. a variable return of the entire stock market (historical average of 7% not counting inflation)?

I plan to use my retirement accounts and cash up front to cover 1L, some of 2L and avoid any compounding interest from 1L. The guarantee of avoiding 3 years of 75k in debt compounding when you aren't making any payments on principal is huge. How is this not the optimal play (especially if you plan on retiring before your 60s)? Assuming your income is low you'd barely pay any tax on the 401k to Roth rollover.

Basing this decision on assumptions about how more debt will encourage you to be frugal is insane.

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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 8:20 pm

NonTradLawHopeful wrote:
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.

But there are no penalties or taxes in the OP's case, right? What am I missing?

No offense, but when the "never dip into your retirement" folks start applying their advice to actual situations, the analysis usually takes the form of mindless aphorisms. I'm usually alone in these debates, so it's probably just me.

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

Postby NonTradLawHopeful » Tue Mar 03, 2015 8:35 pm

rpupkin wrote:
NonTradLawHopeful wrote:
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.

But there are no penalties or taxes in the OP's case, right? What am I missing?

No offense, but when the "never dip into your retirement" folks start applying their advice to actual situations, the analysis usually takes the form of mindless aphorisms. I'm usually alone in these debates, so it's probably just me.


I have honestly never heard of no penalties for withdrawing an IRA for educational benefits. If that's true, there is more of an argument, but I would still never withdraw it. More so because it makes it easier to justify doing it again in the future. Discipline is important if you want to maximize retirement savings.

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

Postby albpert » Tue Mar 03, 2015 8:49 pm

NonTradLawHopeful wrote:
I have honestly never heard of no penalties for withdrawing an IRA for educational benefits. If that's true, there is more of an argument, but I would still never withdraw it. More so because it makes it easier to justify doing it again in the future. Discipline is important if you want to maximize retirement savings.


Here is the IRS rule stating it: http://www.irs.gov/publications/p970/ch09.html

You've now heard.

If facts won't sway your belief that it is never ok to withdraw from a retirement account early, that's fine. But you're saying that because one might withdraw penalty free w/ a low marginal tax rate during school, it will make them more likely to take at least a 10% penalty in the future. How are the two scenarios even remotely related?

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

Postby NonTradLawHopeful » Tue Mar 03, 2015 8:59 pm

albpert wrote:
NonTradLawHopeful wrote:
I have honestly never heard of no penalties for withdrawing an IRA for educational benefits. If that's true, there is more of an argument, but I would still never withdraw it. More so because it makes it easier to justify doing it again in the future. Discipline is important if you want to maximize retirement savings.


Here is the IRS rule stating it: http://www.irs.gov/publications/p970/ch09.html

You've now heard.

If facts won't sway your belief that it is never ok to withdraw from a retirement account early, that's fine. But you're saying that because one might withdraw penalty free w/ a low marginal tax rate during school, it will make them more likely to take at least a 10% penalty in the future. How are the two scenarios even remotely related?


Didn't realize I was on trial here.

Again, that makes withdrawing a better argument, but still not one I would ever do or advise. OP has a 90k headstart on retirement that will continue to grow while in school and while paying off loans. Or he uses all of it and starts at $0 while being three years closer to retirement. I'll go with the former every time, but that is my opinion.

ETA: to clarify about taking the penalty, withdrawing again in the future isn't about the 10% penalty. Many times, if people believe it is OK to withdraw once, regardless of the reason, they are more likely to do it in the future because the money is there.

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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 9:37 pm

The op will need to pay taxes on any pre-tax money he'd be using.

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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 9:45 pm

Tiago Splitter wrote:The op will need to pay taxes on any pre-tax money he'd be using.

Yes, of course. But the point is that, assuming no additional income while in law school, the taxes will be non-existent or very low. In a lot of ways it's an ideal time to take a distribution.

Like I said earlier, the calculation changes if the OP earns significant income while in law school. I mean, if you do a 13-week SA and earn $40,000, then it makes less sense to take, say, $20K from retirement, because you'll be taxed on $60K of annual income.

But if the OP starts in Fall of 2015, and if, like most students, he doesn't land a 1L SA, he'll have no income in 2016. That seems like a great time to pull some money out of an IRA in lieu of taking out loans. The taxes will be zero (or close to it) and there will be no penalty.




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