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rev ronin

IRA distributions to fund PA education?

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I'm looking at pulling money out of my IRAs to fund part of PA school. Has anyone else done this? What are the downsides, aside from treating the distribution as income? Any advice?

 

Fundamentally, I'm looking at drawing down part of my retirement, vs. paying 8.5+% on private loans...

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Most finanical advisors would advise against tapping into your retirement accounts for anything, if it can be avoided.

 

It depends on the type of IRA account you have set up some allow you to take out your principal amount deposited without pentalty, others the return on investment. You first need to find out what fees, pentalties will you occur by tapping into this account? You also need to consider what kind of return on investment do you get or expect to get over the next 2 yrs? These have to be factored into your decision.

 

So if your IRA is expected to average 10.5% growth/ year then you would you would acutally be losing 2% . If it earns 5% a year but you have to take a 10% pentalty then your losing. etc...

 

If you can avoid touching your retirement in my opinion it is worth it even if you take student loans. If you live your first year after graduation like you were still a student on a very strict budget (and trust me you will soon see how fast a year goes by) you can pay off those student loans a lot faster than you think and it will come out to a less than 8.5% interest on that money.

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Don't touch your retirement if at all possible. Agree with the above- the math will probably work out that potential earnings over the next few yrs (market is back on the up) for your investments will outpace any interest you would pay on loans.

Do you own a home that you can borrow against?

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Thanks for the advice, but I'm able to run the funding scenarios myself. Yes, I'm able to borrow against my home, have a great FICO score, etc. but my value system is risk-adverse, such that I'd rather forego potential future income than pay large sums of interest now, whether on my home, credit card, unsecured, etc. and then make catch-up contributions once I have an income again (you know, in lieu of paying off loans...)

 

I'm just interested in the mechanics--how difficult is the record keeping? Does TurboTax handle it well?

 

FWIW, I'm in my 3rd semester of PA school, so I'm mostly exploring options for my clinical year.

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IRS rules state that IRA withdrawals for education are not subject to the 10% early withdrawal penalty. They are treated as ordinary income. If you're taking enough from your IRA to pay for school and living expenses, you'll be in a pretty high marginal tax bracket. Talk to a good tax preparer: IRS enrolled agent, not one of the high volume commercial tax preparers, for advice. You might also want to talk to a financial advisor and your schools financial aid office.

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Do you have a 401k that you can draw against?

Yes, but that's still a loan. Since I'm not currently with that employer, I'm not sure whether or how 401k loans would work, hence planning on rolling my 401k into an IRA so I can make withdrawals.

 

As far as the marginal tax rate goes... I'm married with three kids, so it won't hurt me near as much as it would a single person. I'll still be taking what subsidized loans I can, to minimize the amount I need to withdraw.

 

Good advice on the financial advisor; I was planning on doing that anyways--just hoping that someone here had personal experience on how much of a hassle this was.

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Yes, but that's still a loan. Since I'm not currently with that employer, I'm not sure whether or how 401k loans would work, hence planning on rolling my 401k into an IRA so I can make withdrawals.

 

As far as the marginal tax rate goes... I'm married with three kids, so it won't hurt me near as much as it would a single person. I'll still be taking what subsidized loans I can, to minimize the amount I need to withdraw.

 

Good advice on the financial advisor; I was planning on doing that anyways--just hoping that someone here had personal experience on how much of a hassle this was.

 

My girlfriend recently drew a loan against her 401k for some home improvements and it's 0% interest(since you're essentially paying yourself back). It's automatically paid back through payroll deduction in her case so I don't know what that would translate into for you. Even so, it may be something to look into when you talk to an advisor.

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If you are not currently employed you cannot borrow against your 401K. You can either leave it, roll it or withdraw it. If you withdraw it you will have the pentalty as well as taxes, depending on your tax bracket this can be 30-40% poof gone. Keep in mind even if you roll it into a IRA the same pentalties, taxes may apply if you withdraw it from your IRA because it was pretax when it went in.

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