401K to pay Tuition

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itsmytime10
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401K to pay Tuition

Postby itsmytime10 » Thu Mar 04, 2010 1:31 am

Any thoughts on this?
Is it a good idea to clean out your 401k to pay for law school or take out school loans instead. In this market i am leaning more on the 401k.

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DallasCowboy
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Re: 401K to pay Tuition

Postby DallasCowboy » Thu Mar 04, 2010 1:42 am

What's the penalty for taking it out? Of course the important question is, do you think the 401 is going to make a higher or lower percentage than the loan rate is?

itsmytime10
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Re: 401K to pay Tuition

Postby itsmytime10 » Thu Mar 04, 2010 9:37 am

DallasCowboy wrote:What's the penalty for taking it out? Of course the important question is, do you think the 401 is going to make a higher or lower percentage than the loan rate is?


10% penalty...You can never really tell what the return will be..be you know for a fact that you going to be hit with 6.8%+ in loan interest.

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Sauer Grapes
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Re: 401K to pay Tuition

Postby Sauer Grapes » Thu Mar 04, 2010 9:42 am

There is a thread on here somewhere that you should search for. It talks about there possibly being less of a penalty if the 401K is withdrawn early for education expenses. Don't know if it's true or not, but it'd be worth talking to a CPA about.

MDPSteve
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Re: 401K to pay Tuition

Postby MDPSteve » Thu Mar 04, 2010 9:53 am

itsmytime10 wrote:Any thoughts on this?
Is it a good idea to clean out your 401k to pay for law school or take out school loans instead. In this market i am leaning more on the 401k.


I used a portion of my 401K to fund my Masters without penalty. The IRS website explains it fairly well (I'd dig up the link if I had more time).

Edit: I believe it's only penalty free for tuition, not COL, books, or fees.

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JuTMSY4
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Re: 401K to pay Tuition

Postby JuTMSY4 » Thu Mar 04, 2010 10:14 am

MDPSteve wrote:
itsmytime10 wrote:Any thoughts on this?
Is it a good idea to clean out your 401k to pay for law school or take out school loans instead. In this market i am leaning more on the 401k.


I used a portion of my 401K to fund my Masters without penalty. The IRS website explains it fairly well (I'd dig up the link if I had more time).

Edit: I believe it's only penalty free for tuition, not COL, books, or fees.


Disclaimer: I'm not any type of certified financial professional. Take this advice/info as is.

That's correct. And yes, its only for tuition - which shouldn't be an issue to move money around for. I'm trying to remember the individual IRS section on it (its on their web page though). There's no penalty, but you're responsible for the "income" coming out (remember, it wasn't taxed before). That being said, if you're a student with a meager income as is, you will either be in a low tax bracket or eligible for certain credits/deductions.

The other thing to keep in mind is subsidized loan rates vs potential earnings (probably leaning towards using the 401k with such high rates) and the damage it may due to your retirement (though student loans will also do that). Its all relative - weigh the pros and cons.

You can also due with with a Roth (I believe), but I wouldn't, if I were you...

0L Hoping for 1
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Re: 401K to pay Tuition

Postby 0L Hoping for 1 » Thu Mar 04, 2010 10:15 am

MDPSteve wrote:
itsmytime10 wrote:Any thoughts on this?
Is it a good idea to clean out your 401k to pay for law school or take out school loans instead. In this market i am leaning more on the 401k.


I used a portion of my 401K to fund my Masters without penalty. The IRS website explains it fairly well (I'd dig up the link if I had more time).

Edit: I believe it's only penalty free for tuition, not COL, books, or fees.



I am pretty confident that is incorrect. Can you send me a link that explains that? Everything I have ever seen (including the CPA I talked to when I was thinking about doing this) has said that there is a 10 percent penalty plus you have to pay the taxes (federal and state) when you withdraw money even if for tuition expenses.

Now one thing you can do is roll the 401k into an IRA and then you can withdraw and only pay the taxes. That is the only way I believe you can get out of the 10 percent penalty.

EDIT: IRS Code 72(t) is the section that discusses early withdrawal. It states that you can use Heavy Financial Need due to education expenses to withdraw the money but that you are required to pay federal and state taxes and a 10 percent penalty. The only instances where you dont have to pay the 10 percent are:

You become totally disabled.

You are in debt for medical expenses that exceed 7.5% of your adjusted gross income.

You are required by court order to give the money to your divorced spouse, a child, or a dependent.

You are separated from service (through permanent layoff, termination, quitting or taking early retirement) in the year you turn 55, or later.

You are separated from service and you have set up a payment schedule to withdraw money in substantially equal amounts over the course of your life expectancy. (Once you begin taking this kind of distribution you are required to continue for five years or until you reach age 59 1/2, whichever is longer).

astro1819
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Re: 401K to pay Tuition

Postby astro1819 » Thu Mar 04, 2010 10:25 am

Here is a link to an IRS publication on the issue: http://www.irs.gov/retirement/sponsor/a ... 26,00.html

You may make a distribution for hardship expenses, but that distribution is still subject to tax plus a 10% penalty. Under the "Tax on early distributions" section, notice that hardship distributions is NOT exempt from the penalty.

You may take a loan from a TSP or 401(k), if your plan allows this.



**Disclaimer: I am not a professional, you are responsible for researching the publications yourself and making your own final determinations.

astro1819
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Re: 401K to pay Tuition

Postby astro1819 » Thu Mar 04, 2010 10:35 am

.
Last edited by astro1819 on Thu Mar 04, 2010 10:56 am, edited 1 time in total.

MDPSteve
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Re: 401K to pay Tuition

Postby MDPSteve » Thu Mar 04, 2010 10:36 am

0L Hoping for 1 wrote:
MDPSteve wrote:
itsmytime10 wrote:Any thoughts on this?
Is it a good idea to clean out your 401k to pay for law school or take out school loans instead. In this market i am leaning more on the 401k.


I used a portion of my 401K to fund my Masters without penalty. The IRS website explains it fairly well (I'd dig up the link if I had more time).

Edit: I believe it's only penalty free for tuition, not COL, books, or fees.



I am pretty confident that is incorrect. Can you send me a link that explains that? Everything I have ever seen (including the CPA I talked to when I was thinking about doing this) has said that there is a 10 percent penalty plus you have to pay the taxes (federal and state) when you withdraw money even if for tuition expenses.

Now one thing you can do is roll the 401k into an IRA and then you can withdraw and only pay the taxes. That is the only way I believe you can get out of the 10 percent penalty.

EDIT: IRS Code 72(t) is the section that discusses early withdrawal. It states that you can use Heavy Financial Need due to education expenses to withdraw the money but that you are required to pay federal and state taxes and a 10 percent penalty. The only instances where you dont have to pay the 10 percent are:

You become totally disabled.

You are in debt for medical expenses that exceed 7.5% of your adjusted gross income.

You are required by court order to give the money to your divorced spouse, a child, or a dependent.

You are separated from service (through permanent layoff, termination, quitting or taking early retirement) in the year you turn 55, or later.

You are separated from service and you have set up a payment schedule to withdraw money in substantially equal amounts over the course of your life expectancy. (Once you begin taking this kind of distribution you are required to continue for five years or until you reach age 59 1/2, whichever is longer).


Yes, I rolled my 401K into an IRA to do it, then withdrew from it to avoid penalties. OP didn't ask for details only cost benefit of using 401K vs loans. They should consult a professional or throughly research themselves in the end.
Last edited by MDPSteve on Thu Mar 04, 2010 10:41 am, edited 1 time in total.

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Sauer Grapes
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Re: 401K to pay Tuition

Postby Sauer Grapes » Thu Mar 04, 2010 10:37 am

Hopefull, do you have a link to the tax code for how it's handled if it's an IRA instead of a 401K? I'll probably roll mine over when I quit.

0L Hoping for 1
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Re: 401K to pay Tuition

Postby 0L Hoping for 1 » Thu Mar 04, 2010 10:43 am

Sauer Grapes wrote:Hopefull, do you have a link to the tax code for how it's handled if it's an IRA instead of a 401K? I'll probably roll mine over when I quit.


This is a great document to learn about the taxes you will pay on your IRA distributions, etc: http://www.irs.gov/pub/irs-pdf/p590.pdf

Note that in addition to paying taxes on the withdrawal's you will also have to declare the withdrawals as income with has the potential to reduce the aid you qualify for.

MDPSteve
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Re: 401K to pay Tuition

Postby MDPSteve » Thu Mar 04, 2010 10:45 am

Sauer Grapes wrote:Hopefull, do you have a link to the tax code for how it's handled if it's an IRA instead of a 401K? I'll probably roll mine over when I quit.


http://www.irs.gov/publications/p590/ch ... 1000230799

Higher education expenses.
Even if you are under age 59½, if you paid expenses for higher education during the year, part (or all) of any distribution may not be subject to the 10% additional tax. The part not subject to the tax is generally the amount that is not more than the qualified higher education expenses (defined later) for the year for education furnished at an eligible educational institution (defined later). The education must be for you, your spouse, or the children or grandchildren of you or your spouse.

Qualified higher education expenses. Qualified higher education expenses are tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a student at an eligible educational institution. They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance. In addition, if the individual is at least a half-time student, room and board are qualified higher education expenses.

Eligible educational institution. This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in the student aid programs administered by the U.S. Department of Education. It includes virtually all accredited, public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution.

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Sauer Grapes
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Re: 401K to pay Tuition

Postby Sauer Grapes » Thu Mar 04, 2010 10:52 am

Thanks. I'm not planning on taking any of the money out, but I will roll it over into an IRA just in case.

Genericswingman
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Re: 401K to pay Tuition

Postby Genericswingman » Thu Mar 04, 2010 10:59 am

You will still pay income tax on the withdrawal from a regular IRA but you can avoid the 10% penalty tax.

I am a CPA (must get back to work)

itsmytime10
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Re: 401K to pay Tuition

Postby itsmytime10 » Thu Mar 04, 2010 11:00 am

Thanks for all the info. I will talk to a CPA about it.

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Sauer Grapes
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Re: 401K to pay Tuition

Postby Sauer Grapes » Thu Mar 04, 2010 11:04 am

Genericswingman wrote:You will still pay income tax on the withdrawal from a regular IRA but you can avoid the 10% penalty tax.

I am a CPA (must get back to work)

Thanks. This is what I was thinking, although I don't plan on doing that. Hopefull's link also showed that my wife and I can do the same for up to $10K each as first time home buyers when we end up buying a home eventuallty.

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Sangiovese
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Re: 401K to pay Tuition

Postby Sangiovese » Thu Mar 04, 2010 1:36 pm

You can also look into options for doing a loan from an IRA. You'll be paying the interest back to yourself, and you don't get hit with the fees for withdrawing the money.

And as many have said, this is one of those times when it is worth sitting down and talking to a pro who can help you make the best decision for your particular circumstances.

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MTal
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Re: 401K to pay Tuition

Postby MTal » Thu Mar 04, 2010 1:38 pm

As a series 7/63 licensed broker...I can tell you this is an incredibly DUMB idea.

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thickfreakness
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Re: 401K to pay Tuition

Postby thickfreakness » Thu Mar 04, 2010 1:42 pm

MTal wrote:As a series 7/63 licensed broker...I can tell you this is an incredibly DUMB idea.


What, the going to law school part or the using your 401k to fund it part?

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Sauer Grapes
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Re: 401K to pay Tuition

Postby Sauer Grapes » Thu Mar 04, 2010 1:44 pm

thickfreakness wrote:
MTal wrote:As a series 7/63 licensed broker...I can tell you this is an incredibly DUMB idea.


What, the going to law school part or the using your 401k to fund it part?

Probably both.

I would only do it as a LAST resort, and I'm not a 7 Series licenses BMW like the guy above.

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foxyeconomist
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Re: 401K to pay Tuition

Postby foxyeconomist » Thu Mar 04, 2010 9:54 pm

Everyone I know who is my parents' age or older wishes they had contributed more to their 401k. There is an annual limit on contributions so you can't really make up for this withdrawal later. So I would say, you are better off leaving the money in your 401k and taking out a loan.

MDPSteve
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Re: 401K to pay Tuition

Postby MDPSteve » Thu Mar 04, 2010 11:21 pm

foxyeconomist wrote:Everyone I know who is my parents' age or older wishes they had contributed more to their 401k. There is an annual limit on contributions so you can't really make up for this withdrawal later. So I would say, you are better off leaving the money in your 401k and taking out a loan.


That's a great point and if public service is in your future you may be eligible for loan forgiveness.

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Dignan
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Re: 401K to pay Tuition

Postby Dignan » Sun Mar 07, 2010 1:49 pm

MTal wrote:As a series 7/63 licensed broker...I can tell you this is an incredibly DUMB idea.

Would you mind elaborating? Why is it a dumb idea?

If you roll your 401k into an IRA, you may withdraw from the IRA, without the 10% penalty, for law school tuition expenses. You will, of course, have to pay income tax on what you withdraw. However, you would have to pay income tax on that money in your retirement anyway, when you will (should) have a much higher total income than you have in law school. And, given the direction that our Social Security and Medicare systems are headed, federal income taxes are probably going to be much higher 30 years from now.

It seems to make sense to withdraw from an IRA to pay for tuition expenses, particularly if doing so helps you avoid having to take out Plus loans (with their 8-9% interest rate). What am I missing?

cavebat2000
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Re: 401K to pay Tuition

Postby cavebat2000 » Sun Mar 07, 2010 2:13 pm

Dignan wrote:
MTal wrote:As a series 7/63 licensed broker...I can tell you this is an incredibly DUMB idea.

Would you mind elaborating? Why is it a dumb idea?

If you roll your 401k into an IRA, you may withdraw from the IRA, without the 10% penalty, for law school tuition expenses. You will, of course, have to pay income tax on what you withdraw. However, you would have to pay income tax on that money in your retirement anyway, when you will (should) have a much higher total income than you have in law school. And, given the direction that our Social Security and Medicare systems are headed, federal income taxes are probably going to be much higher 30 years from now.

It seems to make sense to withdraw from an IRA to pay for tuition expenses, particularly if doing so helps you avoid having to take out Plus loans (with their 8-9% interest rate). What am I missing?


Unless your 401k is HUGE, I'd say it is a mistake to use your retirement money to pay for lawl school. Of course, if your like 25 years old, then i suppose that makes a difference because you would have a much greater amount of time for your law school investment to pay off.

My $0.02




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