Retirement fund - affect grants?

[SicVic]

Does having a retirement fund affect eligiblity to get grants or scholarship money for medical school?
For my 1st yr - I have received a nice package but I am worried if next year - I will suffer in grants due to a recently opened retirement account.

Note - it will be the only major asset I will have and its only about 10K.
No finance possible from parents (I'm purely independent). I have only my father alive but he is not in the U>S and definetly not well off.

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[mpp]

You must report on the FAFSA form, the total amount of money you have in bank accounts and securities. However, money in retirement accounts including IRA's (traditional or Roth), 401(k) plans, 403(b) plans, and vested pension plans does not have to be included in your total savings. However, there are certain legal limits to the amount of money you can claim under each of these programs each year. For example, you cannot put more than $3,000 into a Roth-IRA account for 2003.

You do not have to include parental information on the FAFSA for medical school. However, to be considered for many institutional grants you are required to submit parental information.

Some advice: If you receive that money prior to April 15, 2003, you may open a Roth-IRA account and put $6,000 (or up to $12,000 if you are married) into the account: $3,000 for 2002 and 2003 for both you and your spouse. The Roth-IRA is arguably the best government-sponsored retirement plan the U.S. has ever had. If you follow the rules for distributions from that account, the money will be tax-free when disbursed and you may invest it in almost any way that pleases you (money market, stocks, bonds, REITs, etc.).

 

[Fermi]

The one caveat to mpp's post is that all the money you put into retirement funds (IRAs, 401(k)s, etc.) *this year* will be considered as part of your earnings/assets when you apply for financial aid next year. If you are more than a year away from going to med school, you might try to max out your retirement contributions this year, then max out your saving for tuition the year before going to school. That way your retirement contributions will be protected from the FAFSA-EFC monster :wink:

 

[SicVic]

Hmm I need to really read up on the implications of retirement accounts.
If I close the accounts today-and liquidate the money. What will be the penalities? Will I have to report it in my taxes even if the account are closed already?

 

[mpp]

Yes, a distribution from a retirement account can be considered the same as income and taxed accordingly. There may also be some penalties involved. It depends upon the type of account and the reason for the disbursement. You might want to discuss it with a tax consultant. It may not be in your best interest to remove money from a retirement account or borrow against the account. But sometimes you gotta do what you gotta do...

 

[danyela]

I could be totally wrong about this, but someone told me NOT to cash out my TIAAcref(retirement plan) for med school because it would charge me 33% of it in penalties since I am not at retirement age (although I am closer to it than a lot of SDNers)

 

[jlw2004]

•••quote:•••Originally posted by danyela:
•I could be totally wrong about this, but someone told me NOT to cash out my TIAAcref(retirement plan) for med school because it would charge me 33% of it in penalties since I am not at retirement age (although I am closer to it than a lot of SDNers)•••••If you cash out your retirement, you will pay taxes on it at whatever bracket you're in plus 10% penalty -- so if you're at the 23% bracket, and take out $10K, you'll only have $6700 to use for tuition or whatever. HOWEVER, you don't have to pay the penalty for whatever is used for educational expenses -- ie if you have at least $10K in eduational expenses (tuition, fees, etc) you'd have $7700 to use.

There's a spot on Turbo Tax that asks how much of an early distribution was used for higher education and subtracts it out when calculating penalty. And, no it doesn't ask if you took loans out for these expenses.

Hope this helps.

 

[SicVic]

Would I still be penalized if I claim that at the present time, the funds in my retirement fund are my only potential source of income? since I wont be working in Med. school and I'd have no parental/or any form support or financial fall-backs?

How can I tell what Bracket - I'm in?

Thanks alot for the inputs-

 

[CASPA]

To clear up any confusion with the 10% early withdrawal penalty...the penalty would apply if the acct is a 403(b) or 401(k). As for IRA's I believe that would be the only type of account that does have an exception to the penalty.

 

[missbonnie]

Hi everyone-

Actually, you will NOT be penalized for withdrawing cash from a retirement fund ( at least for 401k & IRA) IF it is for full time graduate study, isn't that nice? There are also other things, like buying your first home. I did some reading on this because I have a sizeable amount in my 401k and wwas wondering the same thing. But, before anyone starts withdrawaing ...do some reading and ask the bank.

However, I would not recommend withdrawing from your 401k or IRa anyway, that money grows and has the benefit of being tax-deferred. Your retirement fund will most likely grow at a higher rate than your student loan interest -- short story - you will make money by keeping your retirement money where it is. Plus, why would you want to use up your future nest egg>

-bonnie

 

[CASPA]

A 401(k) or a "qualified plan" will have the penalty. An IRA will not for educational purposes. I work for a financial institution and we go over this question almost everyday. But I copied what the IRS has stated from their website for clarification...

There are certain exceptions to this penalty. The following five exceptions apply to distributions from any qualified retirement plan:

Distributions made to your beneficiary or estate on or after your death.
Distributions made because you are totally and permanently disabled.
Distributions made as part of a series of substantially equal periodic payments over the life expectancy of the owner or life expectancies of the owner and the beneficiary. If these distributions are from a qualified plan other than an IRA, you must separate from service with this employer before the payments begin for this exception to apply.
Distributions that are equal to or less than your deductible medical expenses, that is, the amount of your medical expenses that is more than 7.5% of your adjusted gross income. You do not have to itemize to meet this exception. For more information on medical expenses, select Tax Topic 502.
Distributions made due to an IRS levy of the plan.

The following additional exceptions apply only to distributions from a qualified retirement plan other than an IRA:

Distributions made to you after you separated from service with your employer, if the separation occurred in or after the year you reached age 55,
Distributions made to an alternate payee under a qualified domestic relations order, and
Distributions of dividends from employee stock ownership plans.

The following exceptions apply only to distributions from IRAs:

Distributions equal to or less than your qualified higher education expenses,
Distributions made to pay for a first?time home purchase, and
Distributions made to pay health insurance premiums if you are unemployed.

 

[missbonnie]

Caspa-

You are probably right. I thought I read you could withdraw from 401 for educational expense. Must've mixed it up with IRA. Hmm, now I have some thinking to do.