I'm 30years old and I am going to be going back to college in the fall. Financing is really tight, and monthly bills are my biggest concern. I have around 20,000 in my 401k right now, and I'm going to be leaving my job around early August.

I'm very confused about 401k's, and how/when you can withdraw. I do understand the penalties and taxes associated with withdrawing. I'm looking at the possibility of taking everything and using it to pay off my car (around 7k left) to reduce my monthly bill level, and also using the remainder as a savings account to help pay tuition for future semesters (around 3k a semester).

I'm also a little confused on what happens to your 401k if you leave a job. There is also a high chance that I might be laid off (construction industry) before I leave on my own in August. I'm not sure how this would effect anything.

I know generally it's not at all a good idea, and that you would make more money over the timeframe by not withdrawing. I'm fairly young and very committed to having a good retirement future, but I could very much use this money more at the present.

Is this a terrible idea? Any better solutions? I'd like to be knowledgeable if/when I talk to the plan administrator at my company.

Yes it's a bad idea, first you will only receive about $16K of the $20K. Plus another $2K needs to be put aside for the 10% penalty. Plus you need to put some aside for any additional state and federal taxes.

At 30 it will take a lot to rebuild this nest egg.

If I understand correctly though, I can put my 401k into an IRA when I leave my job, and withdraw for tuition+books penalty free, correct? This is putting aside paying off the car for the moment, and just focusing on the education expense.

Would paying for tuition from an IRA effect stafford loans or federal grants?

Yes you can roll over into an IRA, but not withdraw without penalty.

The IRA shouldn't greatly affect your ability to get financial aid.

I've read multiple sources stating that higher education expenses are 10% penalty free, but you will pay income tax on it.

How is that not without penalty?

Am I misunderstanding?

You can't avoid the penalty by doing a rollover.

Yes, you are correct. One of the differences between a 401(k) and an IRA is that using withdrawals for higher education expenses can avoid the 10% penalty from an IRA, but not from a 401(k). So a strategy of moving the 401(k) account to a rollover IRA after you leave the job, and then using the money for higher education expenses will avoid the penalty. Of course you must still pay income tax on the amount used (federal and state/local if applicable). Also before doing this be sure to check with the IRA custodian to make sure they have no rules that woud limit how long you have to wait after the rollover before using the account to do this, and also whether it's best for the IRA plan to make payments directly to the college (this way they can certify that the money was indeed used for higher ed, which may help reduce your tax filing headaches next year).

I stand corrected