If you have a 401k... Forum

[fingersxd]

Is it best to roll over a portion of it to an IRA and then withdraw (post 1/1/12) to pay for "educational expenses"?

Seems like this is a better option than taking on loans with 7% interest, no? I think it's generally agreed that 401k return is unlikely to be worth more than that, but how much of a detriment would it be to dip into a retirement account?

[citykitty]

I'm not sure, but I'm leaning towards liquidating my rollover IRA for "qualified educational expenses." Less retirement money now in exchange for less debt now seems like a decent trade. I'm not getting 7-8% in my IRA, and that's about what the loans are right?

I don't love the idea of ditching my retirement fund, but debt is no good either. Lesser of two evils IMO, but less money to pay back with interest during the prime of my life is winning in my head right now.

[thesealocust]

Yes, but NB that loans aren't just 7%. Some are much higher. I think this year it's up to 20K in 6.8% stafford, 9? of which are subsidized, and the rest is 8.5% gradplus loans (I try not to think too hard about loans, so I may be off).

At the end of the day it would be a complicated question, but since your rollover is likely going to go towards your gradplus or otherwise non-stafford loans, I would strongly consider that choice if I were in your shoes - but only up to the point where your 401(k) rollover / IRA distribution would be infringing on stafford or subsidized stafford territory. Those terms are probably good enough to be worth effectively using as leverage to your 401(k)/IRA.

[thesealocust]

I'm not sure, but I'm leaning towards liquidating my rollover IRA for "qualified educational expenses." Less retirement money now in exchange for less debt now seems like a decent trade. I'm not getting 7-8% in my IRA, and that's about what the loans are right?

I don't love the idea of ditching my retirement fund, but debt is no good either. Lesser of two evils IMO, but less money to pay back with interest during the prime of my life is winning in my head right now.

This is smart thinking. As I mentioned for OP, it might be worth only busting your 401(k) to the point where you don't need to take any GradPlus loans. Stafford terms are reltively favorable, especially the subsidized ones (everyone should take their subsidized stafford loans, it's free money for three years).

[fingersxd]

I'm not sure, but I'm leaning towards liquidating my rollover IRA for "qualified educational expenses." Less retirement money now in exchange for less debt now seems like a decent trade. I'm not getting 7-8% in my IRA, and that's about what the loans are right?

I don't love the idea of ditching my retirement fund, but debt is no good either. Lesser of two evils IMO, but less money to pay back with interest during the prime of my life is winning in my head right now.

This is smart thinking. As I mentioned for OP, it might be worth only busting your 401(k) to the point where you don't need to take any GradPlus loans. Stafford terms are reltively favorable, especially the subsidized ones (everyone should take their subsidized stafford loans, it's free money for three years).

That's my thinking as well. I'll take the stafford loans for sure. Just wonder how much of my 401k to use. I could cover a very good chunk of my expected debt using all of it, but I don't want to leave myself without any retirement savings until I start working again. I was thinking maybe 25-50%?

[thesealocust]

I'm not sure, but I'm leaning towards liquidating my rollover IRA for "qualified educational expenses." Less retirement money now in exchange for less debt now seems like a decent trade. I'm not getting 7-8% in my IRA, and that's about what the loans are right?

I don't love the idea of ditching my retirement fund, but debt is no good either. Lesser of two evils IMO, but less money to pay back with interest during the prime of my life is winning in my head right now.

This is smart thinking. As I mentioned for OP, it might be worth only busting your 401(k) to the point where you don't need to take any GradPlus loans. Stafford terms are reltively favorable, especially the subsidized ones (everyone should take their subsidized stafford loans, it's free money for three years).

That's my thinking as well. I'll take the stafford loans for sure. Just wonder how much of my 401k to use. I could cover a very good chunk of my expected debt using all of it, but I don't want to leave myself without any retirement savings until I start working again. I was thinking maybe 25-50%?

From a strictly financial planning point of view, as long as you have a few thousand stocked away in a safe and liquid account (online savings, checking, etc.) there's no reason to leave money in the market (expected return 7-9% or so with large risk) while holding debt at 8.5% (the GradPlus rate). It might feel bad to 'lose' a retirement account, but education is expensive and student loans are non-dischargable. They really do cancel out on a balance sheet, and given their respective expected returns you'll be giving away money if you simultaneously hold a 401(k) and student debt - particularly considering the large tax advantages you will receive by paying for your education with tax-free distributions from the rolled over IRA.

It's up to you though, there's something to be said about the psychology of having a sum of money in a retirement account even if it's netted out against loans. Psychology is worth a few basis points over time. And if you get lucky and the next 5 years or so are either high inflation, good for the market, or both you will wind up ahead by holding both (though at any given moment the opposite scenario is as likely, so...).

[vanwinkle]

Is it best to roll over a portion of it to an IRA and then withdraw (post 1/1/12) to pay for "educational expenses"?

Seems like this is a better option than taking on loans with 7% interest, no? I think it's generally agreed that 401k return is unlikely to be worth more than that, but how much of a detriment would it be to dip into a retirement account?

Why post-1/1/12?

[citykitty]

Is it best to roll over a portion of it to an IRA and then withdraw (post 1/1/12) to pay for "educational expenses"?

Seems like this is a better option than taking on loans with 7% interest, no? I think it's generally agreed that 401k return is unlikely to be worth more than that, but how much of a detriment would it be to dip into a retirement account?

Why post-1/1/12?

I assume he has income this year. Next year he won't. While there's no 10% penalty for qualified withdrawals, they are still subject to taxes. If he pulls it out this year, it could move him to a higher tax bracket.

[fingersxd]

Is it best to roll over a portion of it to an IRA and then withdraw (post 1/1/12) to pay for "educational expenses"?

Seems like this is a better option than taking on loans with 7% interest, no? I think it's generally agreed that 401k return is unlikely to be worth more than that, but how much of a detriment would it be to dip into a retirement account?

Why post-1/1/12?

I assume he has income this year. Next year he won't. While there's no 10% penalty for qualified withdrawals, they are still subject to taxes. If he pulls it out this year, it could move him to a higher tax bracket.

That was the thought. I still have to check the #'s just to be sure, but in any case I have more than enough to get by for at least one semester so I don't see any harm waiting until after the new year to be sure.

[schooner]

I'm not sure, but I'm leaning towards liquidating my rollover IRA for "qualified educational expenses." Less retirement money now in exchange for less debt now seems like a decent trade. I'm not getting 7-8% in my IRA, and that's about what the loans are right?

I don't love the idea of ditching my retirement fund, but debt is no good either. Lesser of two evils IMO, but less money to pay back with interest during the prime of my life is winning in my head right now.

This is smart thinking. As I mentioned for OP, it might be worth only busting your 401(k) to the point where you don't need to take any GradPlus loans. Stafford terms are reltively favorable, especially the subsidized ones (everyone should take their subsidized stafford loans, it's free money for three years).

That's my thinking as well. I'll take the stafford loans for sure. Just wonder how much of my 401k to use. I could cover a very good chunk of my expected debt using all of it, but I don't want to leave myself without any retirement savings until I start working again. I was thinking maybe 25-50%?

I've been wondering about this too. One argument against pulling out retirement funds now is that you'll lose those extra few years to allow for compounding, but I don't know how the numbers would shake out (esp in this economy).

What about taking out the loans now and deciding after graduation how much of your IRA to cash out then to pay back the loans? I've always considered retirement savings to be sancrosanct, so I am leaning towards this. I mean, you'd still have to pay the origination fees and the unsubsidized interest (which will be capitalized back into the principal), but maybe those costs would be worth it? (As in, if do well in school and find a decently-paying job that makes the loan payments manageable.)

Also, would it be a good idea to roll over into a roth IRA, suck it up and pay the taxes now, and if the market recovers, enjoy the gains tax free to use for tuition?

I'd love to talk to a financial advisor, but they are costly.

By the way, I think whatever you do, you should set aside an emergency fund.

[theavrock]

Does any of this thinking change with a Roth 401K as opposed to a traditional 401K?

I'll have about $10K almost evenly split between the two and was recently thinking about this. I'm a total noob when it comes to this so if anyone has resources that they would suggest so I can educate myself that would be awesome.

Additionally I will have a few hundred dollars of company stock purchased through the ESPP which they just rolled back out two months ago. Thoughts on what one should so with that?

[citykitty]

I'm don't know much about 401Ks. I had a different type of work retirement account that was turned into a rollover IRA (acts like traditional for taxes). But, I also have a Roth IRA. I think both are subject to the 10% penalty, if not pulled out for qualified educational expenses. So, this is the problem with taking out loans and then paying them back as I understand it. I don't think payback of loans is qualified, but I could be wrong on this. The thing with Roths though is that they've already been subject to taxes, so whatever you pull out won't be taxed again. I'm more inclined to leave my Roth intact and liquidate my rollover.

[schooner]

I'm don't know much about 401Ks. I had a different type of work retirement account that was turned into a rollover IRA (acts like traditional for taxes). But, I also have a Roth IRA. I think both are subject to the 10% penalty, if not pulled out for qualified educational expenses. So, this is the problem with taking out loans and then paying them back as I understand it. I don't think payback of loans is qualified, but I could be wrong on this. The thing with Roths though is that they've already been subject to taxes, so whatever you pull out won't be taxed again. I'm more inclined to leave my Roth intact and liquidate my rollover.

Good point about leaving the Roth alone so you can withdraw in your old age (when you're in a lower tax bracket). I'm still not sure how, though, when to liquidate and distribute my savings over all the years of law school. I have a 401k, Roth, and regular savings. I'd actually rather take out loans than *completely* liquidate my 401K & Roth, but I'm also a lot older than the TLS'ers who will say this is crazy.

Edit: my personal rate of return is also ~20% (both retirement and regular investments), which also makes me inclined to try to leave my retirement funds alone. How are you guys getting such a low rate of return? Stocks have been doing quite well, although I'm pessimistic about the future there, and the bond market will probably tank sometime around August 2.

I just checked whether you can use Roth funds to pay back student loans without penalty (answer is no): "Distributions from a Roth IRA that are taxable are normally subject to an additional 10-percent tax penalty. The penalty is waived to the extent you pay qualified higher education expenses ...QHEE does not include repayment of student loans" http://www.bankrate.com/brm/news/529/20051024a1.asp

[citykitty]

I'm don't know much about 401Ks. I had a different type of work retirement account that was turned into a rollover IRA (acts like traditional for taxes). But, I also have a Roth IRA. I think both are subject to the 10% penalty, if not pulled out for qualified educational expenses. So, this is the problem with taking out loans and then paying them back as I understand it. I don't think payback of loans is qualified, but I could be wrong on this. The thing with Roths though is that they've already been subject to taxes, so whatever you pull out won't be taxed again. I'm more inclined to leave my Roth intact and liquidate my rollover.

Good point about leaving the Roth alone so you can withdraw in your old age (when you're in a lower tax bracket). I'm still not sure how, though, when to liquidate and distribute my savings over all the years of law school. I have a 401k, Roth, and regular savings. I'd actually rather take out loans than *completely* liquidate my 401K & Roth, but I'm also a lot older than the TLS'ers who will say this is crazy.

Edit: my personal rate of return is also ~20% (both retirement and regular investments), which also makes me inclined to try to leave my retirement funds alone. How are you guys getting such a low rate of return? Stocks have been doing quite well, although I'm pessimistic about the future there, and the bond market will probably tank sometime around August 2.

I just checked whether you can use Roth funds to pay back student loans without penalty (answer is no): "Distributions from a Roth IRA that are taxable are normally subject to an additional 10-percent tax penalty. The penalty is waived to the extent you pay qualified higher education expenses ...QHEE does not include repayment of student loans" http://www.bankrate.com/brm/news/529/20051024a1.asp

I'm averaging over the years that I've had it. My accounts were open before the stock markets crashes of the 00s. Yes, things have bounced back, but they took a big hit there for a few years.

I'm a non-trad applicant too, and I don't love the idea of killing a good chunk of my retirement funds, but I am really debt averse and would like to keep the student loans to a minimum.

[brose]

So, would it be smart to just use whatever savings I have (minus 6 mo COL for an emergency fund post grad) to pay for my COL during law school? I'm not paying enough for tuition to take out grad plus. I would feel weird liquidating my 401K and Roth (about 15k, but I'm 24... so I figure I'd let it sit).

[sca218ml]

Let it sit. Esp. a Roth. There is some really bad advice floating around on this thread.

People don't take into consideration that you are limited contributing to a ROTH by your income AND it grows absolutely tax free and you don't pay taxes on it when it gets distributed (when you are old). So can you guarantee a 9% rate of return on your roth? No of course not. But even a 5% return a year on your ROTH, while seemingly "losing" you money compared to your 6.8% loan will actually save you a lot of money in retirement. 24,000 compounded annually at 5% for 40 years is worth almost $170,000 TAX FREE when you are 64. 5% is an extremely conservative estimate too.

24,000 in loans? Since you are paying down principal as you go (and you are adding principal in the compounding scenario above) you end up paying a lot less in aggregate. If you pay it over 15 years your total payments end up being less than $40k in aggregate. (assuming 7% interest rate)

Plus you can write off debt against future earnings on your taxes, hence there are actually tax advantages to having debt. I have no idea what Sealocaust was saying about tax advantages for TAKING OUT money from an IRA? What tax advantages are those?

[schooner]

Let it sit. Esp. a Roth. There is some really bad advice floating around on this thread.

People don't take into consideration that you are limited contributing to a ROTH by your income AND it grows absolutely tax free and you don't pay taxes on it when it gets distributed (when you are old). So can you guarantee a 9% rate of return on your roth? No of course not. But even a 5% return a year on your ROTH, while seemingly "losing" you money compared to your 6.8% loan will actually save you a lot of money in retirement. 24,000 compounded annually at 5% for 40 years is worth almost $170,000 TAX FREE when you are 64. 5% is an extremely conservative estimate too.

24,000 in loans? Since you are paying down principal as you go (and you are adding principal in the compounding scenario above) you end up paying a lot less in aggregate. If you pay it over 15 years your total payments end up being less than $40k in aggregate. (assuming 7% interest rate)

Plus you can write off debt against future earnings on your taxes, hence there are actually tax advantages to having debt. I have no idea what Sealocaust was saying about tax advantages for TAKING OUT money from an IRA? What tax advantages are those?

This is my sense too. I am strongly inclined to take out more in loans than to completely cash out my retirement accounts. I will probably cash out some, but not all. I'm very debt-averse and frugal, but I consider my retirement savings to be even more sacrosanct.

We're not talking just about a lump of cash sitting around. The account balances also reflect the X years the accounts have had to enjoy the magic of compounded interest. And even if your account didn't get a high return in the past decade, your account could get a high return going forward. (I'm not sure how the opportunity cost of forgoing those returns shakes out, though.) For older students making a career switch, starting all over with retirement savings and having fewer years for compounding is a very different situation than still having some retirement savings and having debt, even a lot.

[fingersxd]

Let it sit. Esp. a Roth. There is some really bad advice floating around on this thread.

People don't take into consideration that you are limited contributing to a ROTH by your income AND it grows absolutely tax free and you don't pay taxes on it when it gets distributed (when you are old). So can you guarantee a 9% rate of return on your roth? No of course not. But even a 5% return a year on your ROTH, while seemingly "losing" you money compared to your 6.8% loan will actually save you a lot of money in retirement. 24,000 compounded annually at 5% for 40 years is worth almost $170,000 TAX FREE when you are 64. 5% is an extremely conservative estimate too.

24,000 in loans? Since you are paying down principal as you go (and you are adding principal in the compounding scenario above) you end up paying a lot less in aggregate. If you pay it over 15 years your total payments end up being less than $40k in aggregate. (assuming 7% interest rate)

Plus you can write off debt against future earnings on your taxes, hence there are actually tax advantages to having debt. I have no idea what Sealocaust was saying about tax advantages for TAKING OUT money from an IRA? What tax advantages are those?

Why a 6% loan? Aren't Stafford 6.8% and GradPlus 7.9%? I think for those taking a portion of their 401k-->IRA instead of those GradPlus loans seems reasonable. No, people shouldn't take ALL of it out and an emergency fund is necessary on top of that, but I don't see a good reason not to take portion of your 401k out and limit your debt straight out of school.

I also assume that anyone who pulls out $ from their 401k now to cover loans (and thereby has less debt following graduation) would be smart enough to overcompensate somewhat the first few years of employment by setting aside slghtly more. I mean that seems logical, no? In that case you are avoiding interest rates likely to be well in excess of your 401k return and if you get the biglaw job many people are gunning for you can simply 'overfund' the 401 to make up for the deficit, in which case that 5% compounded over 40 years would be moot and you would really only lose 5% compounding on the portion taken out over 3 years -- much less daunting I would think.

[brose]

Ok, then my gut was right. Thanks!

[schooner]

I also assume that anyone who pulls out $ from their 401k now to cover loans (and thereby has less debt following graduation) would be smart enough to overcompensate somewhat the first few years of employment by setting aside slghtly more. I mean that seems logical, no? In that case you are avoiding interest rates likely to be well in excess of your 401k return and if you get the biglaw job many people are gunning for you can simply 'overfund' the 401 to make up for the deficit, in which case that 5% compounded over 40 years would be moot and you would really only lose 5% compounding on the portion taken out over 3 years -- much less daunting I would think.

OK I didn't try to follow everything you just said, but I wanted to emphasize the annual maximum that you can contribute to retirement: currently $16,500 for a 401K and $5,000 for a Roth IRA. You simply cannot "overfund" these accounts. If you missed out contributing the max in one particular year, you cannot ever get back that opportunity.

[jarak01]

Plus you can write off debt against future earnings on your taxes, hence there are actually tax advantages to having debt. I have no idea what Sealocaust was saying about tax advantages for TAKING OUT money from an IRA? What tax advantages are those?

The point here is that you take a distribution when your AGI is low and therefore your tax rate is low, thus paying lower income taxes on your IRA money.

It seems to me that the whole thing is pretty close to a wash. A ~10% gain on average in the market with moderate to high risk vs. the 7.9% GradPlus rate. It really depends on one's aversion to debt and age, in my opinion.

I wouldn't touch a Roth either way, most likely. My personal case is that I'm 25 and have ~$25k in a 401k and ~$20k in a Roth. I'm thinking about taking the 401k -> IRA money, but definitely not touching the Roth.

[schooner]

Plus you can write off debt against future earnings on your taxes, hence there are actually tax advantages to having debt. I have no idea what Sealocaust was saying about tax advantages for TAKING OUT money from an IRA? What tax advantages are those?

The point here is that you take a distribution when your AGI is low and therefore your tax rate is low, thus paying lower income taxes on your IRA money.

It seems to me that the whole thing is pretty close to a wash. A ~10% gain on average in the market with moderate to high risk vs. the 7.9% GradPlus rate. It really depends on one's aversion to debt and age, in my opinion.

I wouldn't touch a Roth either way, most likely. My personal case is that I'm 25 and have ~$25k in a 401k and ~$20k in a Roth. I'm thinking about taking the 401k -> IRA money, but definitely not touching the Roth.

What would you think about pulling out 401k money, paying the tax, and putting some in a Roth, so at least I'm putting something in a Roth each year? (I have enough in my 401k to seriously contemplate this.) That is, I really wouldn't be saving anything for retirement while in school, but instead shifting 401k money into a Roth. Or is this stupid?

[jarak01]

Plus you can write off debt against future earnings on your taxes, hence there are actually tax advantages to having debt. I have no idea what Sealocaust was saying about tax advantages for TAKING OUT money from an IRA? What tax advantages are those?

The point here is that you take a distribution when your AGI is low and therefore your tax rate is low, thus paying lower income taxes on your IRA money.

It seems to me that the whole thing is pretty close to a wash. A ~10% gain on average in the market with moderate to high risk vs. the 7.9% GradPlus rate. It really depends on one's aversion to debt and age, in my opinion.

I wouldn't touch a Roth either way, most likely. My personal case is that I'm 25 and have ~$25k in a 401k and ~$20k in a Roth. I'm thinking about taking the 401k -> IRA money, but definitely not touching the Roth.

What would you think about pulling out 401k money, paying the tax, and putting some in a Roth, so at least I'm putting something in a Roth each year? (I have enough in my 401k to seriously contemplate this.) That is, I really wouldn't be saving anything for retirement while in school, but instead shifting 401k money into a Roth. Or is this stupid?

It might not be a bad idea to contribute to the Roth while you are in school, as once you graduate (if you get BigLaw), you won't be able to contribute to your Roth anymore. The current AGI limit is $122k, I believe. It would be a tax advantage too, as you are taking your distribution while at a low tax rate.

[fingersxd]

I also assume that anyone who pulls out $ from their 401k now to cover loans (and thereby has less debt following graduation) would be smart enough to overcompensate somewhat the first few years of employment by setting aside slghtly more. I mean that seems logical, no? In that case you are avoiding interest rates likely to be well in excess of your 401k return and if you get the biglaw job many people are gunning for you can simply 'overfund' the 401 to make up for the deficit, in which case that 5% compounded over 40 years would be moot and you would really only lose 5% compounding on the portion taken out over 3 years -- much less daunting I would think.

OK I didn't try to follow everything you just said, but I wanted to emphasize the annual maximum that you can contribute to retirement: currently $16,500 for a 401K and $5,000 for a Roth IRA. You simply cannot "overfund" these accounts. If you missed out contributing the max in one particular year, you cannot ever get back that opportunity.

That's true, but except for non-trad applicant's who are making 150k+ plus (in which case why the hell go to law school? lol), I don't know many people that can actually afford to put away $21,500 total towards their retirement accounts. So I was making the assumption, perhaps unwarranted, that people generally fail to max out their contributions and could simply focus on doing so following graduation.

[fingersxd]

Plus you can write off debt against future earnings on your taxes, hence there are actually tax advantages to having debt. I have no idea what Sealocaust was saying about tax advantages for TAKING OUT money from an IRA? What tax advantages are those?

The point here is that you take a distribution when your AGI is low and therefore your tax rate is low, thus paying lower income taxes on your IRA money.

It seems to me that the whole thing is pretty close to a wash. A ~10% gain on average in the market with moderate to high risk vs. the 7.9% GradPlus rate. It really depends on one's aversion to debt and age, in my opinion.

I wouldn't touch a Roth either way, most likely. My personal case is that I'm 25 and have ~$25k in a 401k and ~$20k in a Roth. I'm thinking about taking the 401k -> IRA money, but definitely not touching the Roth.

What would you think about pulling out 401k money, paying the tax, and putting some in a Roth, so at least I'm putting something in a Roth each year? (I have enough in my 401k to seriously contemplate this.) That is, I really wouldn't be saving anything for retirement while in school, but instead shifting 401k money into a Roth. Or is this stupid?

It might not be a bad idea to contribute to the Roth while you are in school, as once you graduate (if you get BigLaw), you won't be able to contribute to your Roth anymore. The current AGI limit is $122k, I believe. It would be a tax advantage too, as you are taking your distribution while at a low tax rate.

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?