<p>Has anyone out there taken money from 401K to help pay for tution for your child? If so, how bad did it hurt during tax time. Also, did it affect your EFC for the following year? Would the education credits off-set the extra income on taxes?</p>
<p>Withdrawals from a 401k will affect your EFC. They are income and will increase the income reported on the FAFSA. </p>
<p>Everything else depends on your financial situation. </p>
<p>Taxes - how much it hurts will depend on your tax rate. The withdrawals will be taxed at your tax rate (which may or may not be pushed higher depending on your total financial picture) plus you will pay an additional 10% tax penalty on the withdrawal (assuming you are not old enough to withdraw the $$s without penalty)</p>
<p>Education credits offset taxes. The tax on the 401k withdrawals will be treated the same as any other income as far as tax credits. The maximum American Opportunity tax credit is $2500 on $4000 of qualified education expenses. How much you benefit from the credit will depend on your total financial picture.</p>
<p>Can you borrow from the 401K instead and then make it a withdrawal after you child’s junior year when FAFSA is no longer relevant?</p>
<p>I would suggest looking at ANY other option than withdrawing money from your 401K. As noted, it will be taxable income for the year and will affect next year’s EFC. In addition, you are reducing the amount of money IN your retirement account…money that you have judiciously placed there and can never replace. Leave it alone. Either find another way to borrow money for college costs OR find a less expensive college option. Do not withdraw from retirement savings. Simply put…it will affect your retirement income. You can pay back loans with retirement income if you have it…but you probably will never recover the principal and interest from money you withdraw now.</p>
<p>If you can take a loan against your 401K instead of withdrawing AND the interest rate is lower than any other alternative AND you are certain your job is not in danger AND your company allows a loan for educational purposes AND you’ll be employed there long enough to pay it back it is a viable option. Be sure to check what your options are if you leave the company regarding payback.</p>
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This bears repeating.</p>
<p>Omgmom, do you have any other options? HELOC? PLUS loan? Student loan? 401k loans (and especially withdraws) should be reserved for truly dire hardships.</p>
<p>@cptofthehouse, why is fafsa no longer a factor after junior year? </p>
<p>My job is super secure, and I have a government pension for retirement so my 401K is really just gravy. I am under 40 years old so I think I have time to makeup some of the lost 401k money as well. My concern isn’t really about losing the money from 401k, but really about losing the amount of grants received on fafsa due to the withdrawal income from 401k. I plan on taking about 5-10,000 a year from 401k and borrowing 5-10,000 a year on plus loan(we didn’t plan well). I currently have a loan against my 401k so I can’t borrow anymore either. I also plan on my daughter borrowing the stafford maximum (5500) plus about 5,000 a year more. So we will both have about 40,000 in loans after all of this. Am I being unrealistic about the debt.</p>
<p>We thought about borrowing from our 401K since the interest was better than PLUS. We decided against it because the PLUS is only available during these schools years, but the intact 401K is there and we could take out loans later if needed to pay off the PLUS if we had to go that route whereas the reverse is not doable. </p>
<p>I agree that you should not touch that money unless you absolutely have to do so. </p>
<p>Some colleges, BC and HC and possibly GT, are looking at 401K monies and considering them fair game in terms of financial aid consideration.</p>
<p>@cptofthehouse That’s true, i didn’t think about withdrawing later to pay of the loans rather than earlier. Only problem is I think you have to have a tuition bill to qualify for the withdrawal from 401k. I don’t know if they would authorize a withdrawal to pay a loan and not current tuition. I wonder if I just take out 5,000 a year if it wouldn’t affect my EFC that much. At this point I don’t have much of a choice.</p>
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<p>Am I reading this correctly? Your total debt for this ONE kid will be $80,000? Of course this is a personal family decision, but that is a lot of debt for undergrad school. The total payments will approach $1000 a month…that is a lot…for about 10 years.</p>
<p>*@cptofthehouse, why is fafsa no longer a factor after junior year? *</p>
<p>Because you file your last FAFSA when child is a junior (unless you have younger kids who’ll be in college). So, anything you do after you file that last FAFSA spring of junior year, is irrelevant.</p>
<p>That is, if you don’t have younger kids coming along in key years for college and you are applying for FAFSA then.</p>
<p>I look at it like this. There are many people who saved 80,000 for their kids to go to school. Unfortunately, we didn’t do that so we have to pay on the back end through loans. 100% of our need was met so that means our income(100,000+) is supposed to be able to afford it. It’s not my daughters fault we made poor choices and didn’t put away enough money for her education. Our EFC is about 20,000 and the school costs about 60,000. Even if she went to a state school it would cost 20,000 a year so I think it’s feasible to pay 20,000 at a top 20 private vs. a large public. My daughter got scholarships but nothing was a full ride. We would still have to pay about 45,000 for 4 years and that’s at a school she absolutely hates. Option two ( a school she is considering) would cost us about 60,000 for 4 years. I guess I’m looking for parents who took the risk/plunge and who feel it was a good decision. Or took the plunge and totally regret it now.</p>
<p>I did take advantage of this option in a year with 2 big tuition bills. Yes, you will be taxed at an additional amt at stated in the guidelines but be aware that this also triggered an automatic audit from the IRS. Not a problem, but you really need to save all of he tuition payment statements from the universities to document that the $ did indeed go for educational expenses. EFC was not impacted, in the end the impact was less than years of student loan interest.</p>
<p>I am not of the school that it is something to absolutely avoid. In fact, DH and I heavily funded our 401K and other such vehicles with the very idea of using some of it, for college if necessary. Events made it not a good option for us so far, but an option it remains. Just make sure you check out all of the ramifications before doing this. As Paynose , above states, it can be the better way to go. In our case, we did not do the analysis later to see if it would have been a better way to go, money wise, but we bought into the flexibility that PLUS gave us. We can still go into the 401K if necessary since the funds are still there. But once we have no kids in college, the PLUS option is gone. And if we used the 401K money, that would be gone too. In our case, we wanted more flexibility and are and were willing to pay a premium for it, if there was one.</p>
<p>@cptofthehosue - So you currently have plus loans for your kid. Do you regret taking on the debt? What year is your s/d in school and is it too personal to ask what kind of debt you expect to have at the end. Also does your s/d also have loans?</p>
<p>If you need $10,000 a year for four years for college expenses, you will need to withdraw $18,400 per year under these assumptions: </p>
<p>Federal Rate 0.28
State Rate 0.06
Fed Penalty 0.10
State Penalty 0.033
Less Fed savings on State Taxes -0.016800</p>
<p>Effective rate: 0.456533</p>
<p>10,000/(1-.456533) = $18,400 to yield $10,000.</p>
<p>Do you have an IRA you can withdraw from instead? IRAs allow penalty free withdrawals for college. Then you’d only pay the federal/state combined marginal rate (less federal savings on state tax deduction).</p>
<p>@Madison85 - No, I only have the 401k. I always thought since I could withdraw the money for college expenses and my company matches it made sense to save my money there. Now I’m realizing that wasn’t a good idea. If I wasn’t concerned with my EFC changing and my tax issues I wouldn’t hesitate to fund her entire 4 years using my 401k. Like I stated before, the money in there is just gravy because I have a very good company pension and I’m less than 40 so I have some time to rebuild it up if I want to.</p>
<p>I have 5 kids. 2 out of college, 1 in, 1 going next year, so I’ll have 2 in, and I have 1 still just starting high school next year. I took $80K in PLUS to date, and may take more next year. I’m not sure what is left since I took my first one, 10 years ago and it will be paid off by the end of next year, as they are 10 year loans (the timing of the fund disbursement and repayment is why it is still active). </p>
<p>Yes, I regret taking all but about $20K in those loans. I did it with my first child when I didn’t do the numbers and had better economic prospects. Since then, the job, income, investment,health, housing situation has gone down hill as the economy has. It’s a scary to me. My oldest would have happily gone to Binghamton where he was accepted and to any number of other less expensive choices, and he would have had even more reasonable choices had we made cost an issue during the college search process. It was a big mistake and could have been worse, except my second one did choose a state school even though we were still in “stupid” mode and encouraged him to pick where ever he wanted including a number of top priced schools. </p>
<p>So we now have done the numbers and, really $30K a year is what we can afford for college, starting with the third one. But I stretched it upwards to $35K, yeah, a mistake, because you really can spend $5K on any number of things for the kid while he is in college–last year college son broke his nose, and then had another medical emergency that necessitated immediate plane tickets home, and the costs that go towards that sort of thing. Also he lives 2/3 cross country from us, so any visits we make necessitates 2 planes or a plane and a 90 mile drive to get to him. We have close friends in the area so we stay with them, and have really enjoyed the renewed contact that has resulted with these dear folks, but it costs. So, I extended ourselves by making $35K the number. </p>
<p>I’m stuck in a too expensive house with too high taxes due to the housing market. I have other fixed obligations that we undertook as well. So I drive a junker, we have few vacations, nights out, and live a parsiminous life compared to neighbors, and those that we know. It’s the choices we made. Some I would rethink and not do as we did. </p>
<p>None of my kids have loans. It would have been smarter to have them take out the Staffords and have paid them since the interest rates are better for them, but we used PLUS because it was just a lot easier and neater. But more expensive. Thank goodness, our two graduates have no loans, because they are barely making it on their own. One is literally the starving young artist. Both now have their own places to live, but they live close enough that they do get aid from us in many forms. It has not been easy. My oldest is 27 and finally found a “good” job in Manhattan. He does own a car, free and clear and just moved into his own place (he had moved out a few years ago,but job was eliminated and he moved back home) last week. </p>
<p>Anything more specific, PM me. I don’t mind sharing our experiences. I did not and am still not making the best decisions. It’s easier to advise others than to take the best route when emotions are involved. I’m a living example of that and admit it.</p>