I took a 401K withdrawl to pay for daughters college. I paid it back while employed. I changed jobs and I was issued a 1099-R as income from the unpaid balance of the original withdrawl. Question is: Can the 10% penalty be waived for early withdrawl from 401K or is relief only applicable with an IRA withdrawl? If that is the case, for this year, should I roll my 401K into a IRA so I can withdrawl for more college,( yes... $90K a year... ouch!) in 2006/7

Last question first: Yes, roll the money over into an IRA so it is available to pay for the college without paying the 10% early withdrawal penalty.

I do not have my reference material with me, but I believe that you are stuck with paying the 10% penalty, because the early withdrawal was due to the need to pay the 401K loan due to job termination, not educational expenses (at least that's how your 401K custodian views it).

I suggest you get professional tax help. A season pro may be able to find a loophole to prevent you from paying the 10% early withdrawal penalty. I would research it if I had the time, but not at this time of year.