401K -> Education

[ILLMAS]

TP left her job to focus 100% on school, she has now ran out of savings and would like to withdraw from her 401K to pay for her tuition. This is not considered hardship right? So she would be liable for the 10% penalty + federal and state tax if she does indeed take out the money. Has anyone else encounter a suituation like this or is aware that this might qualify as hardship

Thanks

MAS

[Lion EA]

It doesn't matter if it's a hardship, still income tax + 10% early withdrawal penalty. Hardship does not save on taxes or penalties. It might allow an employee to withdraw from an employer's plan. Why doesn't she roll over her 401(k) to an IRA now that she left her job? Withdrawal from an IRA for education can have benefits. With a 401(k), about her only benefit is borrowing and repaying herself with interest; but that's unlikely now that she left her job. Student loans probably have a lower interest rate than her combined income tax rate, and they can often be deferred until after she graduates. Has she worked with the financial aid department of her college?

[mcb39]

Lion is absolutely right. Hardship does not forgive the penalty on withdrawal from 401K. Rules are different for IRA.

[ILLMAS]

Thanks. I did mention about converting the it to a IRA, but once I asked the amount she wanted to withdrawal was very little 3K and she doesn't need the money until Feb 2011, finacial aid covers most of it, she only needs to pay $3,500 out of her pocket. I recommended for her to save from here to Feb, or to withdraw the money in 2011, then she has about a year to save for the tax and penalty. I did make her aware that her current loan against her 401K, the remaining balance is considered a early withdraw because she is no longer employed. So she is on the hook for 3K in 2010. She did ask me another question I was not able to answer her husband just recently finished his term in the arm forces, and wanted to know if the pension he was with the military can be rolled over to his current account, he works for UPS. I told her to have her husband ask the HR department.

[joanmcq]

If she rolls it over, there is no penalty if withdrawn for higher education costs. if she's that broke, why not save $300?

[Pacun]

If she rolls it over, there is no penalty if withdrawn for higher education costs. if she's that broke, why not save $300?

10% penalty is waived if used for qualified post secondary education for Tax Payer, Spouse or dependents.

[joanmcq]

NOT for a 401(k). That exemption is only for IRAs. That's why you first roll it into an IRA, then take a distribution for qualified post-secondary education.