Cashing in 401k to pay tuition

[djtallahassee]

Thoughts? I've got a decent amount built up through my non-tradness, but seeing as it won't really grow a ton during Med school, does it make sense to cash it and pay for tuition for a year or two? Idk, but I am thinking there may be a way to do it penalty free since it's going toward Med school.


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[Crayola227]

Thoughts? I've got a decent amount built up through my non-tradness, but seeing as it won't really grow a ton during Med school, does it make sense to cash it and pay for tuition for a year or two? Idk, but I am thinking there may be a way to do it penalty free since it's going toward Med school.


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no, never do this

I know a doc that was in their 40s, they had a young child under 10
I remember them telling me how they had just finally paid off all their student loans and what an accomplishment it was
they ended up dead a year later, it wasn't something you saw coming

in any case, their student loans would have died with them

money in the bank is usually better than reducing certain types of debt
student loans aren't high interest like credit cards, and unlike other types of debt they die with you, and you can have income based repayment, and they are forgiven after you pay on them for 20 years

that doc's family would have been better off with money in the bank, invested, or I just hope they weren't hurting for money in their efforts to pay that down

you have to live like you might die tomorrow or 50 years from now

for the sort of money you're talking it might be worth talking to a financial planner

 

[Ad2b]

money in the bank is usually better than reducing certain types of debt
student loans aren't high interest like credit cards

Debt = bad

UNLESS: debt is at 1% interest and money in bank is at 2% interest, otherwise, pay off debt.

You know why the mafia are so wealthy (besides the obvious...) - they NEVER use credit. They pay cash for everything - cars, houses, planes, boats, jewelry, food - you name it, it's all done with cash. I understand some of that has to do with tax and criminal evasion but the other reason is that - they never owe anyone for anything. People owe them.

Don't ask me how I know this

 

[djtallahassee]

no, never do this

I know a doc that was in their 40s, they had a young child under 10
I remember them telling me how they had just finally paid off all their student loans and what an accomplishment it was
they ended up dead a year later, it wasn't something you saw coming

in any case, their student loans would have died with them

money in the bank is usually better than reducing certain types of debt
student loans aren't high interest like credit cards, and unlike other types of debt they die with you, and you can have income based repayment, and they are forgiven after you pay on them for 20 years

that doc's family would have been better off with money in the bank, invested, or I just hope they weren't hurting for money in their efforts to pay that down

you have to live like you might die tomorrow or 50 years from now

for the sort of money you're talking it might be worth talking to a financial planner

Current loans are 6-7% which seems high to me. The interesting piece you mentioned was the loan forgiveness after 20 years. I would have to run some numbers, but that could be a viable option.

I assume you get life insurances for death purposes. the 401 isn't big enough to pay for all of med school so it certainly isn't enough for a family to live on more than a few years. Hell, the 401 from a high level would be lucky to grow 6% a year now and we are in a bull market. We will eventually have a bull and go down to much less growth.

 

[rmalia]

Thoughts? I've got a decent amount built up through my non-tradness, but seeing as it won't really grow a ton during Med school, does it make sense to cash it and pay for tuition for a year or two? Idk, but I am thinking there may be a way to do it penalty free since it's going toward Med school.


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Certainly no expert, but have been in financial circles, and would strongly advise against cashing out any tax-deferred savings. I am almost positive there is no exemption from a very severe withdrawal penalty on the basis of attending medical school. Let compounding magic work for you, and if you're still wavering, definitely seek counsel from a financial adviser.

 

[SpartanWolverine]

Agree with the majority of the advice above. I am pretty sure, having thought of doing so myself, that there is no way to have a penalty-free withdrawal for the purpose of school. My understanding is as follows:

401k: 10% withdrawal penalty if under 59.5 yrs old plus tax plus counted as income on taxes. Prohibited from making new contributions for 6+ months. Must be repaid within five years. So, you are allowed to take a hardship withdrawal but it is certainly not penalty-free.

on the other hand

IRA: no early withdrawal penalty. Pay tax (on growth beyond principle if Roth).

 

[holdthemayo]

In addition to paying the deferred taxes on the money, you will also pay a 10% tax penalty for early withdrawal.

I toyed with this idea too, but for now I decided to leave it where it is. Hopefully my future self agrees that this was the right choice.

 

[DocJanItor]

In addition to paying the deferred taxes on the money, you will also pay a 10% tax penalty for early withdrawal.

I toyed with this idea too, but for now I decided to leave it where it is. Hopefully my future self agrees that this was the right choice.

Not in this situation. Once you leave your job and rollover to an IRA, you can avoid the 10% penalty when using it for higher education expenses.

I still think it's a bad idea though. Right now the cost of debt is only slightly less than the average market return. As others have said, it's better to have assets and debt than no assets and no debt.

 

[814965]

The people on /r/financialindependence and /r/personalfinance might have some good advice on this.

 

[Skiiiiiing]

Take a tax hit to skip a huge subsidy and skip some tax breaks. No.

 

[Meridian32]

I did this to pay for part of med school. I rolled my 401(k) into a traditional IRA because there is no early withdrawal penalty for higher education expenses and then deducted med school tuition on my taxes with the net result that I paid little or no taxes during my med school years and it ended up being essentially a tax-free, penalty-free withdrawal from the IRA. Crunching the numbers, it made more sense back then than taking out student loans, and I hope I don't regret it!

 

[djtallahassee]

The people on /r/financialindependence and /r/personalfinance might have some good advice on this.

I'll be headed there when I get an acceptance. The options definitely seem interesting enough to investigate more.

Probably best not too use the 401, but the 6-7% interest rate honestly shocked me. I may end up having to do an underserved area to get some loan forgiveness..Oh well.

 

[FinancingMedicine]

Assuming there were no penalty for pulling out money from a 401k, you should absolutely pull out the money to pay off your 6-7% interest loans (your non-government loans will be even higher.)

Hoping to make more money on your investments than what you're paying in debt is somewhat wishful thinking. If you get a 16% return one year and a 0% return the next year likes stocks often do, your yearly return is actually a not 8%. It might be 7.5% or so. Irregular returns hurt.

On the other hand, your debt will be something like a guaranteed 8% interest (if you have private loans too.)

If there is a way to withdraw penalty free like Meridian32 says, you should absolutely do it.

 

[GreenDuck12]

There is some incorrect information above so lets clarify a few things:
- If you rollover your 401k into a traditional IRA, you CAN access the funds penalty free for educational purposes (anything that is advertised on the schools cost of attendance page can be used penalty free). There will NOT be a 10% penalty as others above have mentioned.
- Using 401k/tIRA funds can be advantageous from a tax perspective as the dollars that you withdraw are taxed at a lower rate (when working, the dollars you contribute would've been taxed at the highest bracket that you qualify for. When withdrawing funds, if you are not earning an income, your dollars will begin being taxed at the bottom of the bracket and gradually increase as you work your way up the bracket). I would recommend not withdrawing any amount that would put you in the 25% or higher federal tax bracket (unless the goal is to avoid all debt)
- Another option would be to do a Roth conversion with your 401k/tIRA investments and allow those dollars to grow tax free. This was advice that was given by the whitecoatinvestor (check out his site) as you will likely be in a much higher tax bracket while working as a physician.

 

[GreenDuck12]

Also, per the effects of compound interest/ compound debt, it would be most advantageous to use 401k/tIRA dollars in the early years of medical school as opposed to later years (i.e. if you choose to pay for two years of medical school, its best to pay for the first two years as opposed to the last, assuming all other factors are equal)

 

[Crayola227]

Assuming there were no penalty for pulling out money from a 401k, you should absolutely pull out the money to pay off your 6-7% interest loans (your non-government loans will be even higher.)

Hoping to make more money on your investments than what you're paying in debt is somewhat wishful thinking. If you get a 16% return one year and a 0% return the next year likes stocks often do, your yearly return is actually a not 8%. It might be 7.5% or so. Irregular returns hurt.

On the other hand, your debt will be something like a guaranteed 8% interest (if you have private loans too.)

If there is a way to withdraw penalty free like Meridian32 says, you should absolutely do it.

this sort of misses my point about thinking about your family

I know someone from med school whose family was going to leave him a lot of money in a trust, and his gf was trying to get him to use this giant chunk of change to pay off all his med student loans

like, what's better, 500K in a bank account you can leave to your kids while you've got 500K in student loans that discharge with death, or getting yourself even stevens?

you could argue that they could pay off that debt, not pay interest, and then just save up to amass that much money but it seems like not many doctors end up doing this, people end up spending what they have and acquiring debt to match their income level

 

[GreenDuck12]

this sort of misses my point about thinking about your family

I know someone from med school whose family was going to leave him a lot of money in a trust, and his gf was trying to get him to use this giant chunk of change to pay off all his med student loans

like, what's better, 500K in a bank account you can leave to your kids while you've got 500K in student loans that discharge with death, or getting yourself even stevens?

you could argue that they could pay off that debt, not pay interest, and then just save up to amass that much money but it seems like not many doctors end up doing this, people end up spending what they have and acquiring debt to match their income level

This, and your prior post, is an interesting perspective. I think there is value in considering what would be left in the event of a premature death. However, I think should the OP opt to use some or all retirement funds, a better use would be to buy a life insurance policy. A life insurance policy premiums would run significantly less than the interest on even the least expensive medical school tuition costs, let alone out of state/private tuition.

 

[DocJanItor]

This thread is the nightmare for every finance professor. It's not shocking at all why doctors go broke.

For all reasonable interest rates, it is always, ALWAYS better to have assets and debt than have no assets and no debt. This is why companies issue debt rather than use cash
I think people get a lot of sticker shock at the cost of med school without being able to think about the long term earning potential. Yes, the residency years are tight, but then you get out and you have TONS of free cash flow.

 

[GreenDuck12]

[

I agree that having assets and debt is better than zero of either. I would not recommend drawing down ones assets to zero. However, I think using tax advanced dollars strategically can be useful, especially during medical school. For example:

Medical school year 1
You use $20000 from tIRA for tuition. The first $9325 is taxed at 10% while the rest is taxed at 15%. The total tax you pay is $2533, leaving you with $17467 to use towards tuition. This means that in this scenario for each pretax dollar you withdraw, $0.87 is being used productively to cover the cost of school.

Practice year 1 (5 years after graduation)
Original $20000 loan amount has grown to $34363 (assuming 7% interest)
Assume starting salary of $220000, which puts you in the 33% federal bracket.
Assuming the physician is contributing the maximum to a 401k, salary is reduced to $202000. Each dollar that this physician uses towards loans at this point is taxed at 33%, reducing the efficacy of each pretax dollar to just $0.67. Not only is your loan amount 71% higher, the dollars you use do not go as far as your tax burden is higher. It is important to keep in mind that in this scenario you will have an increase in cash flow.

Again, I would not recommend withdrawing one large lump sum from a tIRA, nor would I recommend using all available funds. However, I think there is a benefit to offsetting some debt with retirement assets provided saving for retirement becomes a priority after graduating from school.

 

[DocJanItor]

The problem is that you're looking at those situations in isolation and disregarding growth of assets. "Efficiency" of pre-tax dollars isn't a metric we use to calculate value because it disregards the time value of money (TVM). Further, your calculation of taxes is incorrect because
1) contributions 401k are pretax, reducing your taxable income. This leads to
2) The MARGINAL tax rate of $202k would be 28%, but the EFFECTIVE tax rate would only be ~23%

I ran through the numbers and they are almost the same in terms of present value. The difference is risk. If you take debt, you're giving up future income in order to keep an asset (which will continue to grow). If an emergency were to happen, you have the asset to use even if you have to take a penalty. If you don't have the debt or the asset, you have to wait until you earn the money to use it.

 

[star.buck]

Student Loan Repayment - Medical Schools and Students - Government Affairs - AAMC