Dec 23

I am planning on working for a couple of years before going to school for a regular MBA. Can I contribute to my 401k plan now and withdraw it without penalty to fund my college tuition? Or is it better to take the tax hit now, rather than take the penalty later ?

2 comments so far...

  • doreen k Said on December 23rd, 2009 at 1:19 am:

    If you leave your current job before going to school, and you do a direct rollover from your 401k to an IRA, you can use the proceeds for qualified higher education expenses. You will have to pay regular income tax but not the premature distribution penalty.

    If you anticipate that your income will be less while you’re a student, then it is probably to your advantage to take the deduction now and pay regular income tax on the proceeds later when you might be in a lower tax bracket.

    MADMAN is incorrect regarding the premature distribution penalty. On page 53 of the IRS Publication 970, it states that you can withdraw from your IRA without the penalty if you use the proceeds for qualified higher education expenses in the year that you make the withdrawal. Of course, you still must leave the job in order to be able to do the direct rollover of your 401k into an IRA.

  • MadMan Said on December 23rd, 2009 at 1:46 am:

    In addition to paying income taxes when you withdraw the money, there is also a 10% penalty.Therefore, it is up to you – if your tax rate will be more than 10% lower as a student, take it out of the 401k.

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