I have been accepted to a master's program at an ivy league university - a dream come true, but I do not want to be burdened with more student loans. Should I withdraw my pension - 20,000 to cover costs? Will this be tax free b/c its for school?
Thanks
2007-05-11 08:09:55 · 8 answers · asked by Anonymous in Business & Finance ➔ Taxes ➔ United States
No.
If there is anyway possible to keep from touching that money you will be happy you didn't.
You will have to decide which is better. There will be taxes to be paid and if you do go ahead and withhold at 25% on your
withdrawl.
good luck
2007-05-11 10:44:55 · answer #1 · answered by Wood Smoke ~ Free2Bme! 6 · 0⤊ 0⤋
The distribution will be fully taxable as ordinary income regardless of the reason for the withdrawal although there are some exceptions to that for a Roth IRA if you are only withdrawing your original contributions and you've had it for 5 years or more.
If you are under age 59 1/2 there will also be a 10% penalty tax for early withdrawal. However, if this is an IRA you may be able to avoid the penalty tax for educational expenses. There is no such benefit for other retirement accounts such as 401(k)s.
You MIGHT be able to take out a loan against a 401(k) as long as you are still employed by the company that sponsors it. You cannot take out a loan against an IRA or pledge an IRA as security for a loan.
Given the tax implications of raiding your retirement account it will usually cost you less by going with the student loan. And when you factor in the loss of the tax-deferred or tax-free accumulation of the funds in the retirement account you'll always make out better with a loan.
2007-05-11 08:37:32 · answer #2 · answered by Bostonian In MO 7 · 3⤊ 0⤋
Many factors to consider.
1) Your age?
2) How much student loan we dealing with?
3) Will the interest from the student loan offset the gains in your pension?
4) What if this master's program turns out to be too difficult?
5) What if things don't go as planned and you used up your pension at a penalty?
Not being pessimistic, but just factors to consider before making your final decision. Make sure you do the math behind it.
2007-05-11 13:42:01 · answer #3 · answered by lucstudent 3 · 0⤊ 0⤋
That is stupid. never withdraw your pension. However, if you want to, he only way it can be tax free is if you do a pension loan, that you must payback over time like a student loan. If you take your pension out early you have to pay taxes along with a 10% penalty tax. Some pensions allow a loan, but usually for only half the amount in the fund.
2007-05-11 08:14:12 · answer #4 · answered by Chris B 3 · 0⤊ 0⤋
No, it won't be tax free - you'd pay income taxes on the distribution, and possibly penalties also depending on the type of pension.
2007-05-11 17:00:36 · answer #5 · answered by Judy 7 · 1⤊ 0⤋
No. You will have to pay taxes on it and a 10% penalty.
The exception to the penalty only applies to IRAs, not pensions/401k's.
2007-05-11 08:36:31 · answer #6 · answered by Wayne Z 7 · 1⤊ 0⤋
It will not be tax-free as others have explained. You should borrow the money for school and keep your retirement intact.
In the long run you will come out ahead.
2007-05-11 13:09:14 · answer #7 · answered by ninasgramma 7 · 1⤊ 0⤋
They will have your money no matter how you do it.
2007-05-11 09:33:12 · answer #8 · answered by ? 7 · 0⤊ 1⤋