Using your Individual Retirement Money to pay for School

denver nurse · Mar 23, 2013

I talked to a financial advisor about withdrawling money from my roth IRA and my 403B...if used for higher education you can avoid the 10% penalty tax, but there are quite a few loop holes to jump through to get it out...also, i would be taxed around 35% of my total savings if i took it out based on this advisors research...it wasn't worth it for me so guess i will have to rack up another 160k for tuition, living, and such...hurray!

elkpark · Mar 23, 2013

I think you've answered your own question.
"When you repay the loan, you are making the loan payments with money on which you've paid taxes (TAX #1), same as you would if you were repaying a loan you took out using your house or car as collateral. When you eventually withdraw money from the 401k in retirement, you pay taxes on the money (which is income on which you have not previously paid any taxes) at the time you withdraw it (TAX #2)"

Is the "you've answered your own question" comment directed at me? Not going to debate this any further than this, because it's off-topic and I have no dog in this fight anyway, but I've got to say your "taxed twice" logic makes no sense to me at all. You pay taxes once on the money deposited into the account (when you withdraw it during retirement). You pay taxes once on income that you use to repay a loan (which you take out using the 401k as collateral, but is not the money from the 401k). You pay taxes once on two entirely different "sets" of money. At no point are you paying taxes "twice" on a single dollar involved in the process.

elkpark · Mar 23, 2013

I talked to a financial advisor about withdrawling money from my roth IRA and my 403B...if used for higher education you can avoid the 10% penalty tax, but there are quite a few loop holes to jump through to get it out...also, i would be taxed around 35% of my total savings if i took it out based on this advisors research...it wasn't worth it for me so guess i will have to rack up another 160k for tuition, living, and such...hurray!

Have you included in your consideration the amount of interest you will end up paying on the 160k in debt over the life of the loan? Do you still come out ahead taking out the loans?

denver nurse · Mar 23, 2013

Have you included in your consideration the amount of interest you will end up paying on the 160k in debt over the life of the loan? Do you still come out ahead taking out the loans?

I have considered that as well...you make a strong point and i definitely need to talk to another adviser again to get my ducks more in a row. my wife and i have already racked up 140k with our undergrad loans and some credit cards so another 160k (this is roughly what the school estimates for average debt over length of school) makes me kinda sick...300k is a bit overwhelming. we have looked into some of the hrsa scholarships and loan repayment programs through federal gov...not sure about how feasible it is to get these? We have most our saving in a 403B but not sure what it would take to roll that over to a roth IRA...also, if we were in the 25% income tax bracket this year how that would affect it? lots to think about before October when school starts.

flyingfish2u · Mar 24, 2013

Elkpark...may be I am not explaining it well. Here is a direct quote from

http://financialplan.about.com/od/retirementplanning/a/401kloan.htm

Double Taxation

If you recall, your retirement plan contributions are made on a pre-tax basis. This means that you realize a tax break when making contributions to the plan, and you’re then taxed in the future when you take money out of the plan. Unfortunately, when you take a loan from your plan, you may be subjecting yourself to additional taxes.

While regular 401(k) contributions are taken out of your paycheck on a pre-tax basis, the loan repayments are not. This means that you are taking pre-tax money out of your account and then repaying it with after-tax money. This can result in some of this money being taxed twice.

llg, PhD, RN · Mar 24, 2013

I have considered that as well...you make a strong point and i definitely need to talk to another adviser again to get my ducks more in a row. my wife and i have already racked up 140k with our undergrad loans and some credit cards so another 160k (this is roughly what the school estimates for average debt over length of school) makes me kinda sick...300k is a bit overwhelming. we have looked into some of the hrsa scholarships and loan repayment programs through federal gov...not sure about how feasible it is to get these? We have most our saving in a 403B but not sure what it would take to roll that over to a roth IRA...also, if we were in the 25% income tax bracket this year how that would affect it? lots to think about before October when school starts.

I think 300K is way too much to pay for any nursing education. Some things in life are just too expensive and we need to learn to say "NO" some times. As a nurse, you will not be able to pay that loan off unless you live as a pauper for many, many years. Find another way, even if it adds a few years to your timeline. 300K in student loans + credit card debt is financial suicide.

At 5%, the interest alone on a 300K student loan is $15,000 per year! That's not even touching the principle.

ckh23, BSN, RN · Mar 24, 2013

Elkpark...may be I am not explaining it well. Here is a direct quote from
Should You Take a 401(k) Loan?
Double Taxation
If you recall, your retirement plan contributions are made on a pre-tax basis. This means that you realize a tax break when making contributions to the plan, and you’re then taxed in the future when you take money out of the plan. Unfortunately, when you take a loan from your plan, you may be subjecting yourself to additional taxes.
While regular 401(k) contributions are taken out of your paycheck on a pre-tax basis, the loan repayments are not. This means that you are taking pre-tax money out of your account and then repaying it with after-tax money. This can result in some of this money being taxed twice.

Again, when you take a 401k loan the money is not coming out of the 401k. You are getting a loan against the 401k. You are only paying back the loan with post tax money. The money never leaves or goes back into the 401k.

Let's say you have $100k in a 401k and you want to borrow $50k for school. You would get a check from the bank for $50k, but you will still have that $100k in the 401k earning interest for the life of the loan. The only time money would leave the 401k is if you default on the loan.

This is why it is not double taxed, despite what the article says.

denver nurse · Mar 26, 2013

With a 403b and traditional IRA (not roth) you will pay income tax on it even if your income is 0 for the year such as in crna school...you will still have to pay taxes on the money you pull out because that is the same as income and is yet to be taxed...just talked to a tax pro. you need to pull out less than 17,850 to stay in the 10% tax bracket i believe which is still 1,785 buckeroos...so, is that work doing 3-4 times over the course of your program, or would it be better to use the standard fed loans at 6.8-7.8 % interest? I dunno, one could also make the argument, that if you are using your own funds, there is zero chance you will get someone else to reimburse you. on the other hand, some crna's are getting the hrsa loan repayment programs for 2-3 year commitments to under served hospitals...just a little food for thought.

if you have a 403B you can take out a loan against it to use for school and then directly pay yourself (interest free) instead of a lender. they will only allow you to take out a portion of your 403b

if you have a roth IRA: you can take out the original contribution amount (however much you put in at birth of the account) penalty free. i just took out 10k to pay off some high interest credit cards.

decisions decisions...hope this helps a little