@billcsho, does that 5 yr rule apply just to the earnings? I thought one of the above links said you can withdraw the contributions, she could leave the earnings in there, right? That’s why I said to get qualified advice because I don’t know all the rules and how they apply to education expenses.
Lots of good info here… just a couple of other comments…
For 2015, the maximum you can contribute to a 401K is $18K if you are under age 50. Add another $6K for 50 or older.
Don’t forget the tax credits. If you pay $2k out of pocket for qualified education expenses, you can get it back as a tax credit (pay $4K and get $2500 credit). If possible, I would do that and then pay with college savings to make the savings last longer.
@mommdc Yes, I mean taking out the whole Roth including earnings. The contribution can be withdrawn any time for any reason. For taking the advantage of penalty free withdrawal (only earning is subject to penalty anyway) for educatioon etc requires the 5 year rule.
Then why couldn’t she contribute $12 k this year and $12 k next year and then withdraw the $24 k contributions and pay for year 4 out of that?
Whether you can take a loan from a 401k and then continue to make contributions while paying the loan is entirely up to the employer/plan. It is not against the rules for the plan to allow both the loan and continued payments. I’ve done both.
On any qualified 401k plan, if you have a loan and leave employment (any reason, quit, fired laid off), you have 60 days to repay the loan (or include the amount borrowed in any rollover). If you do not, then the loan balance due is considered a distribution, and usually subject to tax as income with a 10% withdrawal penalty.
The 401k limit of $18k also includes the IRA contributions for that year. If you max out on 401k, you can’t also get the tax deduction for an IRA. There is a fun worksheet that you have to complete to determine if you can get the IRA deduction in the same year as the 401k, with income amounts and contributions to fill in. (Did that last year too). I don’t know if you can contribute to a Roth in excess of the limits because those aren’t a tax deduction/credit.
Work2live, it is unlikely OP will qualify for the AOTC any more. For singles it phases out after $80k in income, and is gone at $90k. This is one area where is does benefit someone making about $100k to put the max in the 401k, as the 401k contributions will lower AGI. Won’t change income on FAFSA that much, will qualify you for AOTC.
http://www.irs.gov/Individuals/AOTC
@Work2Live, she would be making too much to claim the AOTC I believe.
Would she earn too much in 2015 to qualify for AOTC?
If it comes to that point, would it be better for her to borrow against her 401k or borrow against her home? I’m thinking that it may be better to HELOC, but I don’t know.
I think borrowing against 401k should a last resort
Honestly, borrowing against a 401k is pretty easy, the payments are deducted from your paycheck so nothing to remember. Setting up a HELOC is more paperwork and can be a hassle. I’d still recommend the HELOC just because the loss of time for the 401k to grow is a big deal to retirement. If you borrow $10,000 from a 401k and it takes 4 years to repay, that’s 4 years your investment is not growing.
One possibility is to set up the HELOC and not borrow from it, borrow from the 401k. Then, if anything goes wrong with the job, one could take the loan from the HELOC, repay the 401k loan, and continue on. It would really depend on the cost of the HELOC set up.
I am also having a higher salary this year while the asset protection decreases next year. I am expecting to pay thousands more next year. So my D is taking whatever subsidized loan they offer this year even we do not need it yet.
If you have a HELOC, borrowing from that is better than a 401k loan, both because of the interest and the paperwork that we experienced when getting a 401k loan.
If you have a substantial 401k, often the entire limit on a loan is 50k or 50%, whichever is higher.
Obviously compare the rates of what you are looking at.
I do not see ANY way (and I guess a promise from an anonymous internet person is worth the paper it is printed on) that you could go from 25K of need-based aid to zero need-based aid. My son is getting 8.5K per year in loans, and again, we make in the six figure range.
Is there any reason, if the pay increase is substantial, you can’t just put aside the money? Or is it purely 18K to the 401k or 18K to college? If six figures is a big deal, I’m assuming it’s not going from 99K to 101K…
The OP said she was going from about $60,000 to $100,000, and then higher the following year.
The OP said that she is contributing to 401k currently (for her retirement). Someone suggested borrowing from 401k. Or take out Heloc. I suggested looking into contributing to a Roth IRA because it would not involve a loan. She could save as much as she could over the two years (not saving if she needed repairs) and then just withdraw the contributions. The advantage would be that the money saved would be more accessible than 401k, but not count as an asset for FA purposes, as opposed to a college savings account.
Then if she still needs money she can still borrow from a heloc.
My mistake on the AOTC. Since I qualify I was thinking she would too but I am married even though we only have one income. With OP income, she would not qualify. HELOC rates are low and interest is tax deductible if you itemize. My financial planners have always said don’t borrow against 401K but it’s a tough situation so you just need to weigh your options. The 401K would probably earn more than the interest on a HELOC though.
Rhandco, the net price calculator says we won’t get any grant aid at $100k. This school does not meet full need and my family size is now just two. Of course, I’ll be happy if I get any grant aid but I’m preparing for what the calculator says since I have a year to get ready.
Once he graduates and is (hopefully) gainfully employed, the OP will have an empty nest, no more college costs, perhaps lower insurance costs for just herself, then the $125k+ income will all be hers…and she’ll be about 50 years old?
At that point, she should be able to aggressively pay off any HELOC or other loans and play catch up with her retirement. Should she consider a Plus loan for any shortfalls those last 2 years?
@2collegewego Are you feeling guilty because your older kids graduated w/o loans while this child might have some loans?
Mom, no. Actually, I expect to pay back his loans. If I can’t pay them immediately after he finishes college, I’ll likely make it up to him at some point.
That is very generous of you, but that is over $20,000 plus interest that you will be missing for your retirement. So then none of your kids had to contribute to their college education at all?
Didn’t say that mommdc. They’ve all contributed.
Oh I see, I’m sorry I didn’t mean to offend. I am just concerned for you.