Tapping a Roth IRA / rollover IRA to help finance school

[ChimpanzeeMinky]

I've been having some trouble finding out information from the IRS on rules concerning early withdrawals from a Roth/rollover IRA to pay for school. As a non-trad, I have a decent retirement account I've accumulated over the years, but minimal outright cash savings. I was thinking of tapping into the IRA to possibly pay for school instead of taking high-interest loans. Have any of you attempted to do this?

Right now I have assets in a Roth, and as that's already been taxed, I take it the withdrawal would not be taxed. I also have money in a 401k, which I am taking *would* be taxed on withdrawal. I've found information that suggests that you can withdraw without suffering the 10% penalty (that penalty being in addition to the standard tax burden on the withdrawal amount) for "qualified" education expenses, but I have not been able to find information on how something qualifies as an education expense, and how the IRS does ordering (if you have educational expenses also handled by loans, for example) and whether this is related to the COA. Also, I have been unable to find any information about caps on the amount you can withdraw, if they do exist.

Anyone attempted this before, or have any good information on how this works?

Thanks!

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[xanthines]

"High-interest" loans? Aren't the rates on student loans below 8%? I have a hard time believing that you'd come out ahead draining your retirement funds to pay for school. As a physician you'll presumably be making enough money to pay that back early (should you choose to do that). In a bent sort of way, that lowers the rates on your loans even more. It seems like you'll make/save more money by leaving your retirement funds to mature.

I think you'd have to run some numbers through some calculators to see what's best for you. You could be talking about higher rate student loans (ie private loans) beyond the stafford/perkins but they're still capped as well.

http://www.salliemae.com/get_student_loan/apply_student_loan/interest_rates_fees/#Med_Priv

My short answer is that I don't know what you should do.

-X

 

[ChimpanzeeMinky]

"High-interest" loans? Aren't the rates on student loans below 8%? I have a hard time believing that you'd come out ahead draining your retirement funds to pay for school. As a physician you'll presumably be making enough money to pay that back early (should you choose to do that). In a bent sort of way, that lowers the rates on your loans even more. It seems like you'll make/save more money by leaving your retirement funds to mature.

I think you'd have to run some numbers through some calculators to see what's best for you. You could be talking about higher rate student loans (ie private loans) beyond the stafford/perkins but they're still capped as well.

http://www.salliemae.com/get_student_loan/apply_student_loan/interest_rates_fees/#Med_Priv

My short answer is that I don't know what you should do.

-X

Thanks for the response!

I'm referring to the loan amounts above the Stafford/Perkins limits. I was thinking of tapping retirement funds to cover those amounts instead of borrowing at rates above 10%, as it seems most private loans will be getting me these days.

 

[xanthines]

I still stand by hunch that you'll probably be better off taking loans (which you can pay back early with no penalty, as well as consolidating later at a lower rate) than tapping into your retirement fund. Again, you'd need some calculators to do some amortizations and whatnot to see how you'd do in the end under various circumstances (will we be in another recession when you graduate?, will interest rates drop like a rock?, How much will you be making as a doctor post-residency? etc etc).

-X

 

[elderjack21]

I thought about using my Roth IRA to help make up the difference between school loans and my actual costs (with family), we actually took out about $3k to help with our down payment.

But, in the end, I think it is a bad idea to drain your IRAs at least for educational purposes. Reason is this...it is much easier to take out than it is to put in. And once you are staff somewhere, you will likely make over the amount allowed to put back in to your Roth IRAs anyway. (I think the income Cap is around 150k).

I do understand the other point of view as well though, if you can save 10% a year by borrowing money from yourself, that is a pretty darn good investment that you won't see in the stock market right now.