YANMFA-Filter: Would it benefit me to withdraw my money from my 401K now, or wait?
August 6, 2011 11:58 AM Subscribe
YANMFA-Filter: Would it benefit me to withdraw my money from my 401K now, or wait?
I am planning on quitting my job at the end of this year and going back to school full time. I have about $30k in my 401K. My current plan is to live off of the 401K money, student loans and assistance from my parents until I am done with school (presumably 3-4 years, as I already have a decent amount of schooling under my belt).
My question is: would it be better for me to take my money out of my 401K now, or wait? The reason I ask is because I know that I will be taxed on this money as income, so would it be better for me to take the money out in a year where I have already worked, or would it be better for me to take it out in a year where I have no other income so that it would be taxed at a lower rate? Also, since it will be considered to be income, would this adversely affect my ability to get scholarships? Or, another option is to leave the money in the 401K so that it can gain value - though I haven't put anything into it in 2 years and it hasn't moved up or down.
Any information that I haven't thought of would be appreciated. I have perfect credit, so I can't imagine that it would be difficult for me to get student loans.
I am planning on quitting my job at the end of this year and going back to school full time. I have about $30k in my 401K. My current plan is to live off of the 401K money, student loans and assistance from my parents until I am done with school (presumably 3-4 years, as I already have a decent amount of schooling under my belt).
My question is: would it be better for me to take my money out of my 401K now, or wait? The reason I ask is because I know that I will be taxed on this money as income, so would it be better for me to take the money out in a year where I have already worked, or would it be better for me to take it out in a year where I have no other income so that it would be taxed at a lower rate? Also, since it will be considered to be income, would this adversely affect my ability to get scholarships? Or, another option is to leave the money in the 401K so that it can gain value - though I haven't put anything into it in 2 years and it hasn't moved up or down.
Any information that I haven't thought of would be appreciated. I have perfect credit, so I can't imagine that it would be difficult for me to get student loans.
Best answer: It's my understanding that you can avoid the 10% tax penalty if roll over the 401k into an IRA.
You can then use the IRA to pay qualified educational expenses. According to this IRS site, you will still have to pay income tax on the money, but you won't have to pay the 10% early-withdrawal fee that you'd normally pay for using the money before you turn 59 1/2.
Further research is required, of course. Good luck!
posted by lizzicide at 12:46 PM on August 6, 2011
You can then use the IRA to pay qualified educational expenses. According to this IRS site, you will still have to pay income tax on the money, but you won't have to pay the 10% early-withdrawal fee that you'd normally pay for using the money before you turn 59 1/2.
Further research is required, of course. Good luck!
posted by lizzicide at 12:46 PM on August 6, 2011
I did exactly what lizzicide describes three years ago. I rolled my 401k into an IRA and then withdrew a portion of it to pay off my student loans. I did not have to pay the 10% penalty, only the taxes.
posted by kimdog at 1:03 PM on August 6, 2011 [1 favorite]
posted by kimdog at 1:03 PM on August 6, 2011 [1 favorite]
Why don't you just take a loan against the 401k? It's like 4% interest, and as long as it is paid off within 5 years, you won't incur ANY penalties.
posted by horsemuth at 4:48 PM on August 6, 2011
posted by horsemuth at 4:48 PM on August 6, 2011
horsemuth, the OP is planning on quitting his job. At my company, if you leave your job, you can no longer take out a loan against the 401k balance, and if you have an outstanding loan, you have to pay it in full. I'm not sure if that's a company-specific rule or if it's like that across the board.
I invest with Vanguard, and this is what they have to say about it: "If you switch jobs, your loan becomes due and payable in full. You have to come up with the full amount due or default on the loan. If you default, the loan payoff will come out of your remaining plan account balance, which counts as a cash distribution. That means you'll pay taxes and the 10% tax penalty on that payoff."
According to this IRS site, loans cannot be taken out against an IRA, so rolling it over at the end of employment in hopes of a loan is not an option.
posted by lizzicide at 6:05 AM on August 7, 2011 [1 favorite]
I invest with Vanguard, and this is what they have to say about it: "If you switch jobs, your loan becomes due and payable in full. You have to come up with the full amount due or default on the loan. If you default, the loan payoff will come out of your remaining plan account balance, which counts as a cash distribution. That means you'll pay taxes and the 10% tax penalty on that payoff."
According to this IRS site, loans cannot be taken out against an IRA, so rolling it over at the end of employment in hopes of a loan is not an option.
posted by lizzicide at 6:05 AM on August 7, 2011 [1 favorite]
Response by poster: The bulk of my 401K money is in a Vanguard account, so a loan is unfortunately not an option. I was not aware that I could roll it over into an IRA. That is super good news. Thank you all for your input!
posted by sacrifix at 9:37 AM on August 7, 2011
posted by sacrifix at 9:37 AM on August 7, 2011
This thread is closed to new comments.
I'm not a financial aid expert, but a quick search suggests that you do not even need to list your 401(k) as an asset when you complete the FAFSA, so it should not affect your ability to get loans/need-based scholarships.
posted by deadweightloss at 12:30 PM on August 6, 2011