Need advice on taking money out of IRA

[md2011]

At age of 35, I am switching my career to MD. I quit my job and doing pre-reqs at community college now. Since I don't have any income for this year, and going to be very modest for next year, I need to take money out of my IRA. I know there is 10% penalty on that and I need to pay income tax, so I want to take money out carefully to avoid as much cost as possible.

My question is, if my tuition is 30,000 a year, take a loan of 36,000, and take money out of IRA for 10,000, do I still need to pay tax and IRA penalty? So basically, is the loan considered as income on the tax return? Can someone give an advice.

Many thanks,

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[Beau Geste]

At age of 35, I am switching my career to MD. I quit my job and doing pre-reqs at community college now. Since I don't have any income for this year, and going to be very modest for next year, I need to take money out of my IRA. I know there is 10% penalty on that and I need to pay income tax, so I want to take money out carefully to avoid as much cost as possible.

My question is, if my tuition is 30,000 a year, take a loan of 36,000, and take money out of IRA for 10,000, do I still need to pay tax and IRA penalty? So basically, is the loan considered as income on the tax return? Can someone give an advice.

Many thanks,

I'm not so sure about the loan, but you will have to pay for the IRA penalty. You should talk to an accountant to get the best advice.

 

[Non-TradTulsa]

I'm not so sure about the loan, but you will have to pay for the IRA penalty. You should talk to an accountant to get the best advice.

I'm a Certified Public Accountant pre-med. Can't give you a detailed answer, though, that would be practicing across state lines and I haven't dealt with personal finances since I left college years ago.

You have to pay the penalty if you withdraw money out of your IRA. Whether or not you can borrow from your IRA depends on how it's set up and where it's set up. And, yes, if you put pre-tax earnings into your IRA, they're taxable when you take them out - in addition to the penalty.

I'm older than you are - I was 43 when I applied (44 when I was accepted - hooray!). But, here's my take on this issue - don't touch your retirement money unless you're absolutely starving. It should be an absolute, absolute last resort. I have enough money in my 401(k) to pay for most of medical school, but no way am I going to.

I'm going to have an extremely difficult time living on a medical student's budget - I'll probably get a home equity credit line, exhaust what I've managed to save in cash (and didn't spend during the application process), and I may have to borrow privately. But - if I didn't finish medical school for some reason or especially if I became disabled, that retirement money is the only security I have in the world. Plus, I need every cent of that money to be building for the future while I'm not working in medical school - otherwise, I'd have to put half of my future income in savings in order to retire.

I know it sounds crazy to take student loans that you'll have to pay interest on when you have perfectly good money sitting in the bank - but my advice for anybody over 30 is still - just say no to retirement withdrawls. This is only my perspective - hope it's some small help.

 

[jbone]

I'm a Certified Public Accountant pre-med. Can't give you a detailed answer, though, that would be practicing across state lines and I haven't dealt with personal finances since I left college years ago.

You have to pay the penalty if you withdraw money out of your IRA. Whether or not you can borrow from your IRA depends on how it's set up and where it's set up. And, yes, if you put pre-tax earnings into your IRA, they're taxable when you take them out - in addition to the penalty.

I'm older than you are - I was 43 when I applied (44 when I was accepted - hooray!). But, here's my take on this issue - don't touch your retirement money unless you're absolutely starving. It should be an absolute, absolute last resort. I have enough money in my 401(k) to pay for most of medical school, but no way am I going to.

I'm going to have an extremely difficult time living on a medical student's budget - I'll probably get a home equity credit line, exhaust what I've managed to save in cash (and didn't spend during the application process), and I may have to borrow privately. But - if I didn't finish medical school for some reason or especially if I became disabled, that retirement money is the only security I have in the world. Plus, I need every cent of that money to be building for the future while I'm not working in medical school - otherwise, I'd have to put half of my future income in savings in order to retire.

I know it sounds crazy to take student loans that you'll have to pay interest on when you have perfectly good money sitting in the bank - but my advice for anybody over 30 is still - just say no to retirement withdrawls. This is only my perspective - hope it's some small help.

I'm having this same problem. My wife's company gave her $16,000 straight up in an IRA. We have contributed nothing to it. I mean nothing. She has now quit her job and we are now preparing for medical school next fall. We were planning on cashing out the IRA to pay off all of our debt BEFORE we hit med school. Smart? Remember, we have contributed nothing to this IRA and I feel it would benefit me more NOW to be out of debt then when I'm a doctor down the road. What do you think? Thanks. By the way, other financial advisors we have talked to have given us conflicting advice. Any help?

 

[Lab Diva]

Put together a spreadsheet to do a side-by-side comparison. One column put the IRA amount then subtract state taxes, federal taxes and the penalty. I think you end up with about half of the original amount. Compare that against subsidized/unsubsidized loans.

My advice is to not touch the IRA money. The cost of taking it out is too high. Instead, can you negotiate with the credit card companies or creditor for a better interest rate or move the money around on 0% credit cards. Check out the student loan rates with several companies.

I am not an accountant or CPA, but I am very conscious of the cost of money and think that this would be a better route.

 

[Non-TradTulsa]

Lab Diva's advice is great.

It's such a temptation to grab the retirement money and pay stuff off - but I'm just philosophically against it. I cashed-in a couple of IRAs myself between jobs when I was in my '20's - but if I'd kept that money, I'd have a lot more put away now. The reason is - you never get around to replacing that money when times get better, even though you promise yourself that you will. It's just human nature. Remember that retirement money, over the long haul, will double in value about every ten years. It's so tough to replace what you have now further down the road!!

 

[Twitch]

At age of 35, I am switching my career to MD. I quit my job and doing pre-reqs at community college now. Since I don't have any income for this year, and going to be very modest for next year, I need to take money out of my IRA. I know there is 10% penalty on that and I need to pay income tax, so I want to take money out carefully to avoid as much cost as possible.

My question is, if my tuition is 30,000 a year, take a loan of 36,000, and take money out of IRA for 10,000, do I still need to pay tax and IRA penalty? So basically, is the loan considered as income on the tax return? Can someone give an advice.

Many thanks,

The loan isn't considered taxable income. We had talked about this and IRA's some time back. Not sure if the search function is back - but I know we discussed this in this forum.

Good Luck.

 

[QofQuimica]

Not sure if anyone didn't know this, but FYI I asked one school whether a student's IRA would count as part of his/her assets for need-based financial aid, and their answer was no. So I agree that it's best to leave the money in the IRA. We're all reaching retirement age faster than we want to acknowledge.

 

[Non-TradTulsa]

Not sure if anyone didn't know this, but FYI I asked one school whether a student's IRA would count as part of his/her assets for need-based financial aid, and their answer was no. So I agree that it's best to leave the money in the IRA. We're all reaching retirement age faster than we want to acknowledge.

Exactly. Neither 401(k), 403(b), or IRA money is included as part of your assets for financial aid (in some cases your home equity is counted, in other cases it's not). It can't be taken away in bankruptcy, either (just ask O.J.). That's why I so strongly recommend treating retirement money as sacred - no matter what happens to you, they can't take it away from you. Those protections are all built into the law, and that's why the government imposes a 10% penalty tax on withdrawls - they're trying to save you from yourself!

 

[QofQuimica]

Exactly. Neither 401(k), 403(b), or IRA money is included as part of your assets for financial aid (in some cases your home equity is counted, in other cases it's not). It can't be taken away in bankruptcy, either (just ask O.J.). That's why I so strongly recommend treating retirement money as sacred - no matter what happens to you, they can't take it away from you. Those protections are all built into the law, and that's why the government imposes a 10% penalty tax on withdrawls - they're trying to save you from yourself!

Ha ha, if they really wanted to help me so much, they'd let me put more in. Why does the gov. limit how much you can contribute to a Roth anyway?

 

[Non-TradTulsa]

Ha ha, if they really wanted to help me so much, they'd let me put more in. Why does the gov. limit how much you can contribute to a Roth anyway?

Because a Roth IRA doesn't require you to start withdrawing money after you reach retirement age - therefore, if the Roth were unlimited, it would be a terrific way to avoid estate taxes. As if we were worrying about estate planning - we're just trying to figure out how to pay for medical school!