Should I cash out my 401K, since I'm going to law school? Forum

[luckynumber8s]

I've been working for about 1 year, will have around 10K in my 401K by the end of my employment (next fall when I start law school).

I figure with starting salary's in 160K +, what does 10K matter now? I'll just be able to live a little more comfortably as a 1L. Oh and I have no other cash savings, $2000 in stocks (was $4000 3 month ago), and 30K in student debt.

Thanks all!!

[nellie06]

As someone who worked as a financial advisor, i would say don't touch the money. You would pay a hefty fine for taking out the money as this point, so it really is not worth it.

[hbb]

Although taking financial advice from strangers on the internet is generally a bad idea, I'd recommended you look into rolling over your 401k into an IRA account if you are determined to use your retirement savings to finance your education.

Without knowing the full details of your situation, I am uncertain what options would be available to you, but in most cases early withdrawals can be made without penalty from certain IRA accounts if used for qualified higher education expenses. Note that such withdrawals may be considered income, which may alter your financial aid situation. Also note that I am not in any way a financial expert, just someone who has also briefly considered tapping retirement accounts for educational expenses.

[sockpuppet]

You could make a sensible case for withdrawing money while in school to pay expenses. As long as you have school expenses greater than the amount of your withdrawals within the year, you can take the money out of any IRA without paying the usual early penalty. You will have to pay regular income tax on it (which will likely be at lower rates than you pay now, with a full-time salary). Also, many schools will count your retirement funds as assets anyway and assign them as part of your expected student contribution. If you take the funds out before school, then you will have to pay the penalty, so it makes more sense to wait until the first calendar year when you have to pay that big tuition bill. If you can afford to, then you would be better off in the long term to invest the money well and keep it in the tax sheltered account, since you get a strict limit each year on contributions, and you can't replace it once you take it out.

[hbb]

you can take the money out of any retirement account without paying the usual early penalty

After looking into this a little further myself, I realize that sock is, as usual, correct: It appears that 401ks can be used to fund certain educational expenses as well, without paying early withdrawal penalties. I have yet to find this information from the IRS directly, so I don't have a dependable link to post.

Additionally, I hadn't given this my full attention the first read through:

I figure with starting salary's in 160K +, what does 10K matter now?

10k now translates into an enormous sum when you retire, almost certainly one that will exceed the amount paid in loans to take the place of this retirement account funding in your plan to pay for your legal education - assuming, of course, you are not already nearing retirement age. If you have no other way to pay for your education, so be it, but if you have other options, holding on to your savings would be the smarter move.

edited for spelling

[sockpuppet]

I have yet to find this information from the IRS directly, so I don't have a dependable link to post.

IRS Publication 970: Tax Benefits for Education
http://www.irs.gov/pub/irs-pdf/p970.pdf
http://www.irs.gov/publications/p970/

Must read for anyone who has to think about how they will pay for college any farther than, "Now where the hell did I leave my Platinum Card?"

9. Education Exception to Additional Tax on Early IRA Distributions
http://www.irs.gov/publications/p970/ch09.html

It looks like it may only apply to IRAs and not funds left in 401k accounts. So you may need to roll the account over to an IRA after you leave your job, if you want to do this.

[Wellsfargowagon]

Take the following with a grain of salt.

Roll the 401(k) over into a regular IRA the year you enter law school, then convert that IRA into a Roth IRA the following year. Unless you snag a biglaw (or similarly paying) job your 1L summer and/or your 401(k) is over 20 grand, the Lifetime Learning credit and standard deduction/exemption nearly guarantee that the Roth conversion will entail no taxes, and it'll grow tax free until you take a distribution.

Do not touch that money unless absolutely necessary. Raiding one's retirement count, according to every financial adviser I know of, should always be treated as a last resort.

[a_uberboy]

I would just say the easiest way to start to look at it would be to see about what rate of return the account has, and then compare it to the interest rate on the educational loan after tax considerations are taken into account.

if it's already earning more than the loan interest, no reason to touch it

[luckynumber8s]

Thanks all. Awesome info and advice. Now when I talk to my financial adviser I have a reasonably good idea of what I want to do.

[Sparr0w]

let it ride brother, let it ride...

[Demosthenes]

^^^Substance, Sparrow, substance!

[sailorbear2008]

let it ride brother, let it ride...

Thank you for providing this valuable and well researched insight. It is posters like you that keep the bar high for incoming TLS members. Thank you for always posting with the utmost of integrity.

[the lantern]

In a similar situation to this fellow, so I just have to ask one more time: If I have ~13k in a 401k, and I am leaving my job before attending law school, it would be much better to roll that into a Roth, invest it well, and use the money when I am retired. I should take out loans for law school rather than use my 401k? Just thinking out loud, I think I could make a higher return on my investments than the interest rate on my loans, so it will help me more to let this money grow instead of blowing it now. I just get very nervous thinking about taking out $90,000 in loans when I already have ~$50,000.

[Unitas]

In a similar situation to this fellow, so I just have to ask one more time: If I have ~13k in a 401k, and I am leaving my job before attending law school, it would be much better to roll that into a Roth, invest it well, and use the money when I am retired. I should take out loans for law school rather than use my 401k? Just thinking out loud, I think I could make a higher return on my investments than the interest rate on my loans, so it will help me more to let this money grow instead of blowing it now. I just get very nervous thinking about taking out $90,000 in loans when I already have ~$50,000.

Why roth? Why not trad. IRA? Fidelity has some really nice no load/low fee accounts.

If you take it out of 401k you are looking at huge fees probably close to 50%. "Maybe a little less depending on income level, tax bracket, and such" If you have a tax advisor go talk to him. If not get one. They are tax deductible.

[the lantern]

In a similar situation to this fellow, so I just have to ask one more time: If I have ~13k in a 401k, and I am leaving my job before attending law school, it would be much better to roll that into a Roth, invest it well, and use the money when I am retired. I should take out loans for law school rather than use my 401k? Just thinking out loud, I think I could make a higher return on my investments than the interest rate on my loans, so it will help me more to let this money grow instead of blowing it now. I just get very nervous thinking about taking out $90,000 in loans when I already have ~$50,000.

Why roth? Why not trad. IRA?

If you take it out of 401k you are looking at huge fees probably close to 50%. "Maybe a little less depending on income level, tax bracket, and such"

You get no fees other than income taxes if you do it right. My dad is a CPA, so he knows how to do this. A Roth generates income tax free. So if I would magically turn than 13k into 50000000000000000000000, I would pay no taxes (although not sure how the conversion would be affected by deposit limits, will have to ask). Nothing wrong with traditional IRA if Roth is maxed out. Am I making sense? I wanted to use the 401k money to pay for school, but the more I think about it, the more I need to suck it up and realize I am going to have big loans.

[Unitas]

In a similar situation to this fellow, so I just have to ask one more time: If I have ~13k in a 401k, and I am leaving my job before attending law school, it would be much better to roll that into a Roth, invest it well, and use the money when I am retired. I should take out loans for law school rather than use my 401k? Just thinking out loud, I think I could make a higher return on my investments than the interest rate on my loans, so it will help me more to let this money grow instead of blowing it now. I just get very nervous thinking about taking out $90,000 in loans when I already have ~$50,000.

Why roth? Why not trad. IRA?

If you take it out of 401k you are looking at huge fees probably close to 50%. "Maybe a little less depending on income level, tax bracket, and such"

You get no fees other than income taxes if you do it right. My dad is a CPA, so he knows how to do this. A Roth generates income tax free. So if I would magically turn than 13k into 50000000000000000000000, I would pay no taxes (although not sure how the conversion would be affected by deposit limits, will have to ask). Nothing wrong with traditional IRA if Roth is maxed out. Am I making sense? I wanted to use the 401k money to pay for school, but the more I think about it, the more I need to suck it up and realize I am going to have big loans.

Really? Pretty sure you will pay fees for early withdraws. I have a CPA and a financial advisor and they have never said this to me... I haven't asked either, because I have no intention of pulling my money out.

Yea, with a roth IRA you pay taxes BEFORE putting the money in with a trad. you pay taxes when AFTER taking the money out. So you can't roll over a 401(k) into a roth. You would have to pay taxes on it first. And also I believe you do pay taxes on earnings when withdrawn in a roth IRA until 60.

IF your dad is a CPA why are you on here asking for financial advice?

[vanwinkle]

Roll it into an IRA and keep it there.

Your 1L year you will have 0 income. You're not finding a paying job, I guarantee that, there are no paying jobs for 1Ls anymore. If you need the money to pay for expenses your 1L summer, take it out then. You'll pay the 10% penalty but 0 taxes.

If it turns out you don't need it, leave it in there and let it ride.

[YCrevolution]

Roll it into an IRA and keep it there.

Your 1L year you will have 0 income. You're not finding a paying job, I guarantee that, there are no paying jobs for 1Ls anymore. If you need the money to pay for expenses your 1L summer, take it out then. You'll pay the 10% penalty but 0 taxes.

If it turns out you don't need it, leave it in there and let it ride.

I'm trying to get a paying job for 1L summer.

[Leeroy Jenkins]

Don't cash it out, bad ideer.

[ggocat]

Roll it into an IRA and keep it there.

Your 1L year you will have 0 income. You're not finding a paying job, I guarantee that, there are no paying jobs for 1Ls anymore. If you need the money to pay for expenses your 1L summer, take it out then. You'll pay the 10% penalty but 0 taxes.

If it turns out you don't need it, leave it in there and let it ride.

There is no penalty if the withdrawal is used to pay for qualified higher educational expenses. http://www.irs.gov/publications/p590/ch ... nk10006428.

If we're talking about a 401k or a traditional IRA, I would probably withdraw the money during law school. Probably a lower tax bracket during law school than when you're 59.5.

[vanwinkle]

Roll it into an IRA and keep it there.

Your 1L year you will have 0 income. You're not finding a paying job, I guarantee that, there are no paying jobs for 1Ls anymore. If you need the money to pay for expenses your 1L summer, take it out then. You'll pay the 10% penalty but 0 taxes.

If it turns out you don't need it, leave it in there and let it ride.

There is no penalty if the withdrawal is used to pay for qualified higher educational expenses. http://www.irs.gov/publications/p590/ch ... nk10006428.

If we're talking about a 401k or a traditional IRA, I would probably withdraw the money during law school. Probably a lower tax bracket during law school than when you're 59.5.

Even better!

[Leeroy Jenkins]

I may be wrong, but I think qualified higher level education applies only to college studies, and not post-graduate studies.

[YCrevolution]

I may be wrong, but I think qualified higher level education applies only to college studies, and not post-graduate studies.

As long as it's an accredited law school, there shouldn't be problems in that regard.

Qualified higher education expenses. Qualified higher education expenses are tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a student at an eligible educational institution. They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance. In addition, if the individual is at least a half-time student, room and board are qualified higher education expenses.

Eligible educational institution. This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in the student aid programs administered by the U.S. Department of Education. It includes virtually all accredited, public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution.

[b.j.]

I've been working for about 1 year, will have around 10K in my 401K by the end of my employment (next fall when I start law school).

I figure with starting salary's in 160K +, what does 10K matter now? I'll just be able to live a little more comfortably as a 1L. Oh and I have no other cash savings, $2000 in stocks (was $4000 3 month ago), and 30K in student debt.

Thanks all!!

I was under the impression you could roll it over into some sort of IRA-type thing where you might have to pay taxes but wouldn't have to pay a penalty, but since the financial adviser that commented first didn't mention this, I thought not. So I decided to do a quick Google search.

According to the the article in USA Today, you can roll over your money into an IRA and then use it to pay for college. Perhaps there is some specific rule that prevents you from doing so, but perhaps not. Call up a financial adviser and just explain your situation. They should be happy to help if they can get your business.

If it is possible, I'd say the answer revolves around how much money you think you'll need and how much you don't want to take out in loans and how much you think this account will grow due to compounding over time. I don't know what you are invested in, but that's something to consider. If there's even a slight chance that it'll grow aggressively, you might be better off leaving it as is. You can always cash it out in some fashion when you graduate if you really need the money.

That's pretty much what I am trying to do. I have a 401K at work that is growing rapidly because of the way I am paid. I could probably use the cash, but unless I am going to have to pay some taxes if I go over the contribution limit, I will probably leave it. It's like forced savings. The same goes for my other investment account. It's almost entirely in ETFs, which if you aren't familiar with them are like mutual funds whose value changes throughout the day as they are traded like stocks. Any dividends I make are automatically reinvested. It's nothing huge now, but since I invest $500 minimum every month and am trying to ramp it up to $1500 a month, I figure that they will keep growing. If I actually start school next year, they will only grow so big, since I would only have so many months at work left. But I figure that if I can generate at least $100 a month in dividends before I go, I will try to ride it out as long as possible before I need to stop the automatic reinvesting and use it as regular income instead.

http://www.usatoday.com/money/perfi/col ... -IRA_N.htm

[gocubs2010]

the ira is a nice idea.

when my dad died I inherited his 401k and pension and life insurance and all that stuff. that really doesn't apply to you since it's your money. but, I had his 401k money still in the same funds that were in the 401k. anyway, once the economy went to hell, i woke up one morning with $6000 less than when i went to bed. so just be careful. i had to get an emergency loan to finish paying tuition for that semester of undergrad. if you are really worried about the money, go for the ira. hell, if you get it out, put it in a cd. not very sexy, but its the one of the few that are sure things.