Using your Individual Retirement Money to pay for School

CPhT2RNstudent · Mar 15, 2013

That's my plan.

denver nurse · Mar 15, 2013

what is the tax penalty on that bad boy for rolling over? I am looking at ten million ways to try and avoid adding more debt to my mound i am already sitting on before starting my program in october

jax67 · Mar 15, 2013

that is part of my plan, especially if i cant secure as much as i need in federal/private loans, but im hoping to just do this if its absolutely necessary. i dont think a penalty is given if its used for higher education purposes but it has to be for "qualified expenses." also pretty sure it will be considered part of your income for the year so youll get taxed on it (i could be wrong but that's what im understanding). i need to speak with a financial advisor to be sure. good luck!

Goose Xx, MSN, RN, EMT-P, CRNA · Mar 16, 2013

You can take out a loan against your 401 one and pay it back. So you are borrowing against your own money. Did it.

flyingfish2u · Mar 16, 2013

Just wondering what's the advantage of borrowing money from 401k and paying it back with money that has been taxed? Will you will be taxed again when you withdraw at retirement?

ckh23, BSN, RN · Mar 16, 2013

Just wondering what's the advantage of borrowing money from 401k and paying it back with money that has been taxed? Will you will be taxed again when you withdraw at retirement?

When you use a 401lk loan your not actually taking the money out of the 401k, you are borrowing against it. So the financial institution that administers it will loan you the money and you pay it back just as you would any other loan. The difference is if you default on the loan then the money is taken out of your 401k and you get hit with the penalties associated with that. The 401k money is just collateral for the loan.

flyingfish2u · Mar 17, 2013

When you use a 401lk loan your not actually taking the money out of the 401k, you are borrowing against it. So the financial institution that administers it will loan you the money and you pay it back just as you would any other loan. The difference is if you default on the loan then the money is taken out of your 401k and you get hit with the penalties associated with that. The 401k money is just collateral for the loan.

Yes, the borrowed money is paid back with post tax income. Then you will have to pay taxes again on your 401k when you withdraw at retirement. Essentially you are taxed twice. It's probably better to roll over the 401k to an IRA; then using it to pay for tuition without paying 10% early withdrawal penalty. Of course you will be taxed, but you will be taxed at a lower rate since you have no other income as a student. I just want to know if anybody has done this..

PacoUSA, BSN, RN · Mar 17, 2013

I took money out of my IRA to pay for the last semester of my BSN, with no regrets. This money was previously in a 401(k) for a company I left several years prior and I rolled it into an IRA with Scottrade. I will only be taxed on the money withdrawn, I will not have to pay a 10% penalty on top of that because the money was used for an educational purpose, per IRS rules. Considering the fact that I would not have graduated without having done this, it was money well used.

missnurse01, MSN, RN · Mar 22, 2013

I thought that if you borrowed against it you had to start repaying immediately...that was one reason I was not looking at that option. I am still looking at withdrawing, no penalty but taxed at your normal tax rate. So figured I would wait until next year when my income is zero - but there is still a minimum rate, they go by your last tax rate from income. I can't remember now what the tax lady told me. I am trying to consolidate them, I have a bunch of them hanging around.

elkpark · Mar 22, 2013

Yes, the borrowed money is paid back with post tax income. Then you will have to pay taxes again on your 401k when you withdraw at retirement. Essentially you are taxed twice.

Not sure where you're getting this "taxed twice" notion. You're not being "taxed twice." The money you deposited into the 401k is deposited tax-free. That money stays in your 401k. You are borrowing new/different money, using the 401k account as collateral. When you repay the loan, you are making the loan payments with money on which you've paid taxes, 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.

flyingfish2u · Mar 23, 2013

Not sure where you're getting this "taxed twice" notion. You're not being "taxed twice." The money you deposited into the 401k is deposited tax-free. That money stays in your 401k. You are borrowing new/different money, using the 401k account as collateral. When you repay the loan, you are making the loan payments with money on which you've paid taxes, 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.

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)"

This is the reason why borrowing from 401k is bad! Better to roll it over to an IRA, then withdraw money to pay for tuition when you have zero income.