This is for a friend. I thought 401k withdrawals used for education avoided the penalty. In Pub 970 (our friend!) it only refers to IRA early withdrawals. Are 401k withdrawals included? She said Turbotax charged the penalty.
Any ideas? I searched a little and many of the articles include 401ks, but no citations.
I think she needs to use form 5329 and indicate on line 2 the exemption she is claiming for education expenses that is not subject to penalty. Google instructions for this form and read the directions for line 2.
The answer is no. See http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics—Tax-on-Early-Distributions
Okay, just one more place in the tax code I would get screwed; I have a 401k and not IRAs!
Are you able to borrow the $$ from your 401k and pay yourself back?
It’s not for me. I have 401k’s but no longer work so it would be a withdrawal for me. For the person I’m asking for, I believe she already took it as a withdrawal. There are rules about 401k loans, it can only be a certain percentage of the total in the account, you have to re-pay within a time period, and I’m not sure if she met the requirements for the loan or just wanted to do a straight withdrawal. Done deal now anyway. She was just trying to avoid the penalty and I incorrectly thought 401k withdrawals were penalty free.
I was wrong. I thought 401k withdrawals for education were penalty free. I did a little googling and it appears many others also are wrong, but since I couldn’t find any citations for those opinions who said “sure, it’s fine, take the withdrawal” I figured I’d ask the experts here. Thanks, experts.
I know it is a done deal. But could she have roledl over from 401k to Ira , and then withdrew from Ira?
Yes, if no longer employed at that company or if that company allowed in-service rollovers.
The information on this forum should not be used in any actual transaction without the advice and guidance of a tax professional who is familiar with all the relevant facts.
This is a big mistake. I am surprised that anyone is saying that 401ks can be used for education rather than retirement as intended.
This is an “understandable” mistake to make given that distribution from IRA is allowed to be used for education and not for retirement. It is actually a reasonable way to fund the last year of college (the year not considered for finaid purposes)
If you roll over to an IRA, doesn’t it have to be in the IRA for 5 years before withdrawal and no penalty? I didn’t work through it because I’m not using my 401k for educational purposes (unless my kids go to a 5th year and by then I’ll be 59 1/2), but I thought I saw a section requiring 5 years before withdrawal penalty free.
And why do those IRA people get to withdraw for education and the 401k people don’t? It just seems unfair.
You can take a hardship withdrawal from your 401k to pay for education. However, you will be subject to penalties and the money becomes taxable income
That’s true for taking ANY withdrawal, becomes income and penalty. It used to be hardship withdrawals did not have the penalty, but they’ve pretty much shut most of those down.
Post #11: you are confusing this with the 5 year rule relevant to ROTH IRAs.