401(k) withdrawal that was for someone else

<p>Hi Guys,</p>

<p>I'm in a predicament the will seriously affect my ability to pay for and hence, go to college. Basically my dad has a 401(k) account which was his nest egg and his ticket for the college education of all four of his children (me and my siblings). Unfortunately my dad's brother fell into some very hard times and was having a lot of difficulty with money. My dad withdrew his complete 401(k) and loaned it out this brother. My dad's brother would've been able to pay it back by now but his business is going south and it looks like he won't be able to pay back the money for some time. </p>

<p>Basically because my dad withdrew his 401(k) in one year his total income just puts me just above the level for complete scholarship at the UCs. So, because his 401(k) withdrawal was technically not income and because he loaned out the money to a brother (has proof on where the money went) do you think I will be able to appeal my family EFC for next year?</p>

<p>Thanks</p>

<p>ee92</p>

<p>401k accounts are retirement accounts and aren’t the best place to park money intended for college expenses, as you’ve probably come to realize. Hardship withdrawals are possible, but they’re subject to a 10% penalty plus tax on the realized gains. Hardship loans are also possible, subject to the employer’s rules, but are typically a max of 50% of the total value.</p>

<p>What year did your father withdraw all of his 401k funds? If it was this year and you’ll be filling out FAFSA next January, then the withdrawal will appear on his 2010 taxes as income. I don’t see any way around this. Your father no longer has the cash, so it won’t be listed as an asset for FAFSA. Once you’ve filed FAFSA, you could ask for a review by the UC financial aid office to see if they’ll allow a special circumstances adjustment. These are often granted for Roth IRA conversions, which is somewhat of a comparable event (although something that in many circumstances is a wise financial move, unlike early withdrawal of a 401k).</p>

<p>You might have to wait a year (or two), attend a CC, and then reapply to your favorite UC as a transfer.</p>

<p>It doesn’t matter what the money is used for…if you withdraw money from a 401K, it WILL be listed as income on the taxes. </p>

<p>Even if your dad used this money for your college bills, the amount withdrawn would have required tax payment and would have been listed as income on the taxes.</p>

<p>I’m not sure what to tell you. Financially, using a 401K for anything but retirement has significant implications for taxes and financial aid.</p>

<p>You can and should explain the 401K withdrawal and what happened to the funds when you apply. My personal opinion is that it won’t make any difference,: I certainly would not grant this as an exception, If your uncle needed an organ transplant or other medical treatment, I would give it consideration, but his reason for that withdrawal just isn’t crucial enough, in my opinion, </p>

<p>I know a number of folks that did the same sort of thing; none of them got any consideration for that withdrawal, and what they did take a gap year at the school they liked best, and then reapplied for fin aid that following year. These kids used the year for Americorp, community service, internships, traveling and taking some local college courses.</p>