[valleyman0724]

I am receiving a layoff in 1/2010 from a company. I have approximately $114000 in a 401k account which I'm considering having distributed. I'm very far from reaching the penalty avoidance age of 55. Fidelity Investments is the plan's manager. If I decide to take a lump sum distribution and I say I'm using all funds for higher education, will Fidelity probably mark my 1099-R with that associated code? Will the IRS actually confirm I used it for that purpose? What if I change my mind and don't use the money for that purpose? How does the IRS track the higher education use of 401K money? Would I be assessed a penalty on top of the 10% early withdrawal penalty?

[ebaines]

Actually, using the money for higher education does not relieve you of the 10% early withdrawal penalty. There is often some confusion about this - higher education expenses are defined as a "hardship," which means that your plan must allow you to withdraw funds for this purpose - but being a "hardship" does not mean that you aren't subject to the penalty (or income taxes).

One thing to consider is this - roll your 401(k) to an IRA, then make a withdrawal from there. Withdrawals from IRAs used for higher education DO qualify for an exception to the 10% penalty. Go figure. However, I suspect that the IRA custodian would want to see the tuition bill from your school before they would certify that the money was used for this purpose.

[Five Rings]

Remember also that the amount you withdraw will be taxed as income regardless of how you use it.
The 10% penalty is just an extra little incentive for you NOT to withdraw these funds.

[AtlantaTaxExpert]

It is MORE than a LITTLE incentive to not withdraw, considering that the 10% penalty cannot be mitigated, meaning that, after all credits, deductions and exemptions are factored in, you will STILL owe the 10% penalty.