401K and Tuition

[mainecoon]

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This is a question for the non-traditional pre-vet students --
Did you have a previous career where you built up a 401k? I was hoping to use mine to pay my fall tuition bill, but am getting mixed answers on whether I would have to pay the penalty on top of income tax. Anyone looking into this option, too?
Thanks for any advice! 🙂

 

[VeganSoprano]

My understanding is that there is no penalty if it is used for educational expenses.

 

[SilverSpyderGT]

If you are making more than 6.8% returns on your 401(k) investment, you're better off taking out student loans at 6.8% interest.

 

[StartingoverVet]

There is no penalty for withdrawal but you will have to pay taxes on the money withdrawn. For that reason, and the loss of the tax deferred earnings compounding in a 401k or IRA, it is highly inadvisable to withdraw the money. I would go with the loans unless you are investing your money very conservatively. Over the LONG run, unless you are nearer retirement, you will probably be better off with loans.

 

[sumstorm]

a hardship withdrawl means that there isn't a penalty (the 10% tax) just potential income tax. However, remember that once withdrawn, it is nearly impossible to restock a 401K or IRA because of annual limitations in contributions. That is why withdraws are highly discouraged. We eleceted to take out student loans, leaving my IRA intact, and then work on reducing expenses and putting things like tax refunds towards paying down student debt.

 

[StartingoverVet]

a hardship withdrawl means that there isn't a penalty (the 10% tax) just potential income tax. However, remember that once withdrawn, it is nearly impossible to restock a 401K or IRA because of annual limitations in contributions. That is why withdraws are highly discouraged. We eleceted to take out student loans, leaving my IRA intact, and then work on reducing expenses and putting things like tax refunds towards paying down student debt.

Just to clarify, because sunstorm is right but it still may be confusing to you. There is no penatly (10% tax), but there is still TAX on the amount withdrawn because that is income you earned originally that was never taxed. You would be taxed on that eventually when you retire but by withdrawing it now, you are foregoing the tax free accummulation that really makes your money grow faster. Also, you have to realize you will have to pay that tax and will have to withdraw enough to pay the tax and your expenses. So as Sunstorm says... no penalty tax but you will still be paying taxes as if you had just earned it.

Now, if your income is low enough, you may pay a really low tax rate (or no tax at all) so there could be an advantage to withdrawing some of it now if you have no income. It is obviously not a straight forward answer!

 

[mainecoon]

Thanks for all the information.
My income will be pretty low this year considering I'll be quitting my job in July so I would have to think my income tax on withdrawing the 401K would be pretty low.

I understand what you are saying, SilverSpyder, when you said, "If you are making more than 6.8% returns on your 401(k) investment, you're better off taking out student loans at 6.8% interest."
My reasoning for considering withdrawing my 401k is that I will already be taking the max in the subsidized student loans for living expenses, and want to try to avoid taking unsubsidized loans if possible. However, it seems like it's not that straightforward and might be a good idea to discuss with a financial advisor.

That leads me to another question... 🙂
Is all your student loan money distributed at one time at the beginning of the school year? If at the end of the year you have excess, do you use it to start paying down the debt, or can your amount you receive the next year be decreased based on not needing that much the previous year?