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cdeignan47 · Jan 7, 2009, 01:22 PM

As I recently got laid off from my job I'm considering investing in graduate studies. One of the means of financing same would be to withdraw from my IRA or 401K accounts. Of course I am concerned regarding whether this is a good idea from a long term perspective financially (depletion of retirement accounts and the tax implications).

Thank you.

Christopher

stevetcg · Jan 7, 2009, 02:13 PM

Well, from a long term investment point of view, it is never a good idea to take money out of your retirement UNLESS your return on it will meet or exceed the amount you would have gained (compounded) had you left it in.

For instance: if you take out 20000 to pay for graduate school, how much can you realistically expect to make extra from having a graduate degree? Remember that the 20k is growing (in theory) and compounding, so figure 10% increase per year until the extra money is returned.

Basically my point is that in may not necessarily be a good or bad idea... it really all depends on your field. In my field, no one could care less except a clueless HR recruiter what degree I have. Getting a MS would simply cost me money with little to no ROI.

As for the tax implications, I *BELIEVE* that monies taken out and used for school is tax exempt. Please let someone smarter verify this, but it is pointless to tax the disbursement as income since it would simply be deducted 10 lines down on your 1040.

ebaines · Jan 8, 2009, 01:24 PM

Regarding tax implications: if you take the money out of your 401(k) you will have to pay income taxes on the withdrawal plus a 10% early withdrawal penalty. If you take the money from an IRA - it depends on the type of IRA. If it's from a traditional or roll-over IRA, you would pay income taxes on the "pre-tax" portion of your origial contributions plus earnings that are included in the withdrawal. If it's from a Roth IRA the withdrawal can be tax free if the money has been invested at least 5 years in the IRA. In either case, there is no 10% early ithdrawal penalty if the money is used for qualified higher education expenses (tuition, lab fees, books, etc).