What do I do with my 401K from my job before starting medical school?

[itscomplicateddd]

I ended up with around ~$5,000 in my 401k from my gap year job. From my understanding, it will grow at around a 5-6% rate without any contribution. To be honest, I do not know too much about how all of this works.

I have some minor debts lying around and was wondering if it was wise to disburse my 401k to pay them off before medical school. I understand that the purpose of a 401k is retirement, but with medical school and residency coming up, isn't it better to incur the penalties and get rid of all high interest debt?

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[LizzyM]

You pay taxes on that money plus a 10% penalty for taking the money before you are 59.5 years of age. That makes it pretty expensive money.


You take $5,000 from your 401K this year when you are working and you'll get about $3,500 after taxes and penalty.
So that $3,500 cash has cost you $1,500 (maybe less if your tax bill winds up being less than your withholding).

Leave it and let it grow.

If you can wait and cash it out in a year when you aren't paying much in taxes (M2, M3) the taxes will be less although you'll still be paying ~$500 penalty.

 

[WisNeuro]

You can always just roll it over into a traditional IRA, say at Vanguard. At that point you can contribute up to the personal allowance if you have any extra cash or get some windfalls along the way until you get a big boy job later on.

 

[ciestar]

I rolled my 401k over into a Roth IRA before school started

 

[----x----]

As others mentioned, I plan on rolling mine into my Roth IRA once I finish working.

Look into boggleheads, and there are some good resources linked on reddit's personalfinance wiki/FAQ. you could also look at whitecoatinvestor for the few pre-medical articles.

I think you can contribute up to 5,500 per year into an IRA now. Your roll over 401k doesn't take away from the amount you can contribute (though it sounds like you likely wouldn't contribute to this)

 

[DatInterviewDood]

With IRA, is there exemption from withdrawing penalty if we use the money for tuition?


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[Miami Thrice]

With IRA, is there exemption from withdrawing penalty if we use the money for tuition?


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Same question but for a Roth. From a previous career I have considerable savings in a Roth and am planning on using it to help finance M1, I'm trying to find a CFA to chat w/but recall early withdrawals for education being ok...

 

[----x----]

FinAid | Saving for College | Retirement Plans
Roth IRA Withdrawal | Withdrawal From Roth IRA | Charles Schwab

If you pay tuition for example, you won't pay any penalty on anything.

If you're just taking the money out, it depends on how old the account it - you may pay taxes on anything you take out, or just on your earnings (not principal you put in).

 

[partypantss]

Slightly related question, if I have a large (100-150k) savings, would it be wise to leave at least some small portion of that invested in an index fund and use the rest to pay for school? Should I also put some aside as an emergency fund? say I have 100k, should I put say, 80k towards school, 10k in savings for emergency and 10k leave invested? How would you adjust these ratios?

 

[RudySoapdish]

I ended up with around ~$5,000 in my 401k from my gap year job. From my understanding, it will grow at around a 5-6% rate without any contribution. To be honest, I do not know too much about how all of this works.

I have some minor debts lying around and was wondering if it was wise to disburse my 401k to pay them off before medical school. I understand that the purpose of a 401k is retirement, but with medical school and residency coming up, isn't it better to incur the penalties and get rid of all high interest debt?

With IRA, is there exemption from withdrawing penalty if we use the money for tuition?


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Same question but for a Roth. From a previous career I have considerable savings in a Roth and am planning on using it to help finance M1, I'm trying to find a CFA to chat w/but recall early withdrawals for education being ok...

I have been in this same situation with an IRA from a previous job rolled into a Vanguard IRA that I took an early withdrawal from.

(Disclaimer: I am far from an expert in these matters, and I don't know the specifics of your situation.)

My early distribution was not penalized 10% because I had paid post-baccalaureate tuition in a greater amount during that same year. On top of that, I essentially had no other income that year, so after taking the standard deduction, I paid no tax on the distribution.

Though leaving the money in the account would typically be the prudent choice, it's possible that your debt situation would make withdrawing a better choice.


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[Miami Thrice]

I have been in this same situation with an IRA from a previous job rolled into a Vanguard IRA that I took an early withdrawal from.

(Disclaimer: I am far from an expert in these matters, and I don't know the specifics of your situation.)

My early distribution was not penalized 10% because I had paid post-baccalaureate tuition in a greater amount during that same year. On top of that, I essentially had no other income that year, so after taking the standard deduction, I paid no tax on the distribution.

Though leaving the money in the account would typically be the prudent choice, it's possible that your debt situation would make withdrawing a better choice.


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Thank you for sharing your experience! I agree that most times leaving money invested is the best idea, but the idea of battling compounding interest at a guaranteed 5-6% clip is stomach churning (especially when returns for the invested assets are anything but guaranteed).

 

[Opto2MD]

So how do I know what's considered a "qualified" educational expense?

Would I be submitting those qualifying costs upon withdrawing from the IRA or during the next tax season?

I am not savvy when it comes to these things so forgive my ignorance.


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[Yuanjing]

Tagging for later reading. Great question OP

 

[partypantss]

If it is in a regular savings account, it may be counted as asset for FA and you may not have a choice. I would consider opening an account as above in Schwab, Fidelity, or Vanguard, putting some large fraction (75%) into low cost, broad based, wide spread, passive index funds (Large Cap, Mid Cap, Small Cap, International something like 35%, 30%, 25%, 10% spread). Avoid Bond funds. Put the other 25% into the money market at the fund, which is essentially a savings account you can withdraw from.

You think I should invest and take out loans? Isn't it a bit of a gamble to shoot for beating the already huge interest rate on loans? I'm curious as to your logic, it seems like an unsound strategy to me. Putting the bulk of it towards school means a guaranteed 5.3-6.3% return on my investment (in avoiding loan interest.) Is the greatly added risk really worth the possibility of beating the 5-6% by a couple percentage points?

If I were to invest I would mainly go with vanguard's index 500 fund.

 

[libertyyne]

Not taking out loans is a garunteed positive return of what ever the interest rate is on your loans. The trick I think is to only withdraw when your income is zero for the year so you don't get taxed at your current rate. I believe if you are using it to pay qualified educational expenses you do not get hit with penalties either.

You will have to roll the money over to a separate account manager because your job will not manage the funds anymore. There is a way to convert the money into a backdoor Roth IRA but that is outside the scope of this conversation.

 

[JB50]

Send it to me opie ill make it grow at a rate of -100%

 

[RudySoapdish]

So how do I know what's considered a "qualified" educational expense?

Would I be submitting those qualifying costs upon withdrawing from the IRA or during the next tax season?

I am not savvy when it comes to these things so forgive my ignorance.


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Publication 970 (2016), Tax Benefits for Education

If the amount of your distribution is equal to or less than your tuition, all you really need is the form your school gives you (1098-T, I think) to include on your tax return.

If you're using the money for more than just tuition, the advice I got (disclaimer: unpaid advice, so caveat emptor) was to get your school's published COA (or at least those components that fall within the IRS guidelines in that link) and attach it along with your 1098-T on your tax return.


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[libertyyne]

Publication 970 (2016), Tax Benefits for Education

If the amount of your distribution is equal to or less than your tuition, all you really need is the form your school gives you (1098-T, I think) to include on your tax return.

If you're using the money for more than just tuition, the advice I got (disclaimer: unpaid advice, so caveat emptor) was to get your school's published COA (or at least those components that fall within the IRS guidelines in that link) and attach it along with your 1098-T on your tax return.


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Do you have to reduce the money you take out in loans if you are using 403k money or can you take out the full COA?

 

[RudySoapdish]

Do you have to reduce the money you take out in loans if you are using 403k money or can you take out the full COA?

No idea, I'm afraid. Hopefully someone with experience in this can chime in.


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[Opto2MD]

Publication 970 (2016), Tax Benefits for Education

If the amount of your distribution is equal to or less than your tuition, all you really need is the form your school gives you (1098-T, I think) to include on your tax return.

If you're using the money for more than just tuition, the advice I got (disclaimer: unpaid advice, so caveat emptor) was to get your school's published COA (or at least those components that fall within the IRS guidelines in that link) and attach it along with your 1098-T on your tax return.


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Thanks for that. I have like $2k which is considerably less than COA and I feel would be much more useful to me for expenses now than to leave it in the account (but maybe I'm wrong). Financial experts care to chime?


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[libertyyne]

Thanks for that. I have like $2k which is considerably less than COA and I feel would be much more useful to me for expenses now than to leave it in the account (but maybe I'm wrong). Financial experts care to chime?
As mentioned above, minimize penalties and taxes by waiting to withdraw.
If you use it in lieu of taking out additional loans it is beneficial as you are preventing interest accrual on new loans. That being said , it is like 1 percent of the debt burden do what you want.

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[BlessUp]

Here is some very quick tips/lessons and I would suggest an easy way to do this.

1) The easiest way to understand funds is are they taxed when you put money in or are thy taxed when you take money out? Most retirement funds, a 401(k), which is employer based, or IRA, which is individual funds have money go in tax free/pre-tax and have taxes taken out when you withdraw.

2) Call up any of the big fund companies (Fidelity, Vanguard, or Schwab) an tell them you want to roll it over.

3) once you are rolled over you can invest in any of the funds that company is offering, which can be overwhelming in number.

4) You should put your money in a passive/index fund which simply follows some index and matches it without trying to manage and beat the market.

5) these funds should be low cost, under .10 per $100 dollars. Schwab has a series of new ones of these at something like .05

6) I would suggest something like 40% in S&P 500, 40% in a midcap 400 and 20% in a small cap like "Russell 2000"

7) then leave it alone and check back on it once or year or in 5-10 years.

8) You can contribute up $5,000 a year and get a tax deduction up to about $100,000 income but something you dont have to worry about for a while

This is great advice, I just have one question.
As for #6, I am curious as to why you recommend this spread instead of sticking with a single total market fund. With only $5000, might it make more sense to use a single total market fund (for simplicity's sake and for meeting required min contributions to pay lower fees)?

-Just a curious kid.

 

[TexasSurgeon]

Like others have said, you can either keep it going or transfer it to a IRA/Roth and just hold onto the money. You'll get anywhere from 5-10% if you're investing in funds that are tracking some sort of index

 

[Miami Thrice]

If folks have some down time, this is an excellent resource to begin (and refresh) learning about personal finance. It should be available at any library, and will provide you with guidance on what to do with $20 you save on buying it.

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Eleventh Edition)