An age of retooling
Ever since I started retooling some job skills, I’ve been wondering how to best take a 401k early withdraw to pay for some continuing coursework. Boy did I receive an education! Finance after 50 can involve schlogging through tax code to make sure you’re not paying taxes unnecessarily. With a little planning it can be done.
When I started putting this post together, most of the stuff I found about drawing down on retirement funds was related to making a withdraw from retirement money to help kids pay for college. However, what about using it for ourselves? If you’re interested in reading a little more about what led me here, you can read about taking a year off. One of the key things to remember when making any type of withdraw from your retirement funds, is that you will be foregoing opportunity costs. Those are the returns that you might have gained over time if you had left the money untouched. However, a former boss gave me a wise piece of advice. He was a successful investor and people would always ask him where to invest. He always had the same answer. Take the money and invest in yourself.
IRA & 401K early withdraw limitations
Since I’m only 51 years young, there are certain restrictions to withdrawing from IRA’s and 401k’s for college expenses. Actually, for 401k’s, withdraws before 55 are always subject to a 10% penalty. No exceptions. IRA’s have several exceptions for avoiding the 10% early withdraw penalty.
I wasn’t fully aware of that limitation, so that’s helpful in creating a strategy on which account to draw down upon. Between me and my wife, we have 3 core retirement accounts, 2 IRA rollovers and a 401k rollover.
Find a credible school
The holy grail for educational deductions is the “Form 1098-T”. The details on this IRS document can be found here. This is the document that confirms that the school is an “eligible educational institution”. I’ve been considering some courses at General Assembly and happened to receive an email from them yesterday. They offer digital marketing and data analytics courses. I haven’t heard back from them yet regarding if they provide this form. Many of the courses that they offer are in the $5K range, so if they don’t offer it, I won’t be going there.
Regardless of avoiding the 10% penalty, any withdraws are treated as regular income. Since we’re currently a one income family, that shouldn’t affect us that much.
To offset some of the income taxes, you might be eligible for one of two tax credits. The lifetime learning credit or the American opportunity credit. Both of these are $2,000 credits, which directly reduce your tax bill when you file. Credits are generally better than deductions, because deductions only reduce your tax liability by a certain percentage. Watch for a follow up post regarding this topic, where I’m going to break down the courses I’m considering and and estimate on how much in taxes we will be paying on any withdraws.
Besides education, what might make you consider an early withdraw from your retirement funds?