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ROTH IRA/TRAD IRA/401K use for Grad School

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Dubya123
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ROTH IRA/TRAD IRA/401K use for Grad School  Reply with quote  

Hope everyone is doing well.

I have a question concerning funding graduate school. I have three different accounts with varying amounts in each. With graduate school in my near future (1-2 years out) I want to make sure that I begin to get my ducks in a row as far as funding my masters. I will most likely be working full time while in a part time nightly program but want to see my options as far a funding is concerned.

I have about 25K in a traditional IRA and about the same in a IRA (25K).

Which (or both) can be withdrawn penality free in order to pay for continuing education? Would I just pay capital gains tax on my gains and face no other fees?

Assuming that I hold the same security in each account, is there some higher level approach that would come into play when taxes are concerned?

I'm single, 24, no mortgage, no kids/wife, salary appox 65K a year. Aside from the two above IRA's. I have 34K in work sponsored 401K and about 40K in a regular taxable brokerage (trading) account. I mention age and filing status as i seem to get extra screwed when it comes to tax time. Generally would like to avoid that.

All things considered, is there a recommended approach to getting my finances structured so that this is a easy transition? Alot is up in the air concerning my options as far as school is concerned.. but lets assume its 30K a year.


Thanks guys
Post Wed May 15, 2013 11:59 am
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MrNewEngland
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I have no idea about if you can use the IRAs or the 401k to fund college so this post is absolutely useless to you. I'm just impressed that you have $124,000 saved up at 24.

Are you sure that your work doesn't do any kind of education reimbursement?
Post Wed May 15, 2013 2:16 pm
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oldguy
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quote:
I have about 25K in a traditional IRA and about the same in a IRA (25K).


Actually, this may not be possible - the contribution limit to IRAs is $5000/yr, it was less 10 years ago. And if you had earned income over $5000/yr when yu were age 13 or 14 you might have stretched some labor laws? That aside - if you sell the Trad IRA the pre 59 1/2 penalty is 10% and you pay ordinary fed & stae income taxes - so the bite is probably about 42% in your bracket. As for the Roth IRA, you can take out your own contributions penalty/tax free, and you can also take the earnings if you've had the account for over 5 years (sounds like you have).

But you have a BS in a good field, pays $65k at age 24. And the goal is to add skills (and therefore higher pay) - isn't there an employer tuition program that will pay as you go? If not, if you have to break into your money I would use the $40k in the taxable account - you pay only 15% cap gains on your profits.

As for your 401k/IRAs - are you invested in things that historically earn 11%/yr? That's the important metric - 11%/yr on your $125k is about $2.8M at age 54, even if you never added any new money. Very Happy
Post Wed May 15, 2013 3:11 pm
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MrNewEngland
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quote:
Originally posted by oldguy
quote:
I have about 25K in a traditional IRA and about the same in a IRA (25K).




As for your 401k/IRAs - are you invested in things that historically earn 11%/yr? That's the important metric - 11%/yr on your $125k is about $2.8M at age 54, even if you never added any new money. Very Happy


If he's got $50K in his IRAs at 24 I would suspect he's getting a great ROI on whatever is in those IRAs.
Post Wed May 15, 2013 3:29 pm
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clydewolf
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Re: ROTH IRA/TRAD IRA/401K use for Grad School  Reply with quote  

quote:
Originally posted by Dubya123
Hope everyone is doing well.

I have a question concerning funding graduate school. I have three different accounts with varying amounts in each. With graduate school in my near future (1-2 years out) I want to make sure that I begin to get my ducks in a row as far as funding my masters. I will most likely be working full time while in a part time nightly program but want to see my options as far a funding is concerned.

I have about 25K in a traditional IRA and about the same in a IRA (25K).

Which (or both) can be withdrawn penality free in order to pay for continuing education? Would I just pay capital gains tax on my gains and face no other fees?

Assuming that I hold the same security in each account, is there some higher level approach that would come into play when taxes are concerned?

I'm single, 24, no mortgage, no kids/wife, salary appox 65K a year. Aside from the two above IRA's. I have 34K in work sponsored 401K and about 40K in a regular taxable brokerage (trading) account. I mention age and filing status as i seem to get extra screwed when it comes to tax time. Generally would like to avoid that.

All things considered, is there a recommended approach to getting my finances structured so that this is a easy transition? Alot is up in the air concerning my options as far as school is concerned.. but lets assume its 30K a year.

Thanks guys

As the other posters have commented, you have amassed a considerable amount for such a young age. Let it ride....

First you should check with your employer about any tuition refund program they may offer their employees. Most employers do have such a program.

As was posted earlier, you can take your ROTH IRA annual contributions from the ROTH IRA at any time, without tax and penalty and use that for any reason. If you distribute gains from your ROTH IRA, income tax would apply to the distributed gains. Using the distribution for higher education expenses the 10% penalty would not apply to the gains.

Distributing money from your Traditional IRA (TIRA) you would need to pay income tax. Higher education expenses are exempt from the 10% early distribution penalty. Distributing more than the higher education expenses the excess would be assessed the 10% early distribution penalty.

As long as you are employed by the 401k employer, you can not take a distribution from that plan. Your 401k may have a loan feature that would allow you to borrow the lesser of 1/2 of your account balance or $50,000. These loans have an immediate payback plan. And if you were to leave that employer, the loan balance is due immediately or it is considered a taxable distribution subject to the 10% penalty for early distribution. The 401k does not have any early distribution penalty exemptions.

But it would seem that with your current income, and over the next 2 years you could save up enough money for your grad school.

Your actions, check your employer for tuition refund programs, and start saving for your graduate work.
Post Wed May 15, 2013 3:58 pm
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littleroc02us
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I would take heart to what OldGuy said regarding paying close to 42% in taxes on pulling out retirement funds. I would not personally recommend what your thinking about doing. I too was there in my late twenties and made a horrible mistake of pulling out 7k in retirement and paying around 35% in taxes, when if I would have left that amount in my Roth's and now I'm 42 years old, I'd have 26k. The magic of compounding can never be made up, the earlier you start the better.
I'd find another alternative to paying for graduate school with ideas like working, grants, scholarships, etc...

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Wed May 15, 2013 7:39 pm
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MrNewEngland
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Actually... if you can get some student loans that would probably be the way to go with rates as low as they are right now.
Post Wed May 15, 2013 8:28 pm
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Dubya123
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Thanks for all the quick replies..

I'll address a couple of these items separately.

I misspoke on the IRA's.. Roth has 25K... the TRAD IRA has $9K... I included some of the regular brokerage money in with the TRAD IRA in error.

Brokerage is correct at 40K.


I will note that 2012 & mostly 2013 investment returns have favored me greatly... so take the market being at quite a high into consideration.. 22% ytd return across all investments isnt sustainable (in my opinion). But i'll take them while i can.

The roth is probably the oldest of the accounts and ive been putting money in that since highschoolish age (or thereabouts)..birthday money, graduation money etc was all put in this account.... parents matched 100% of what i saved from working during the summers. . (pre college--probably only cost them <$1000 all things considered... very valuable lesson though).. .


No additions in the past few years due to TRAD contributions.


At this point-I'm hearing that i should ignore the 401K work option as far as funding... I know for sure that my employer doesnt match anything of substance.

How about 529 options for myself? is that worth a consideration?


How does this info help or change the situation... Scattered thoughts, i know. Thanks in advance!!
Post Wed May 15, 2013 8:35 pm
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Dubya123
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I heard a quote for a student loan at somewhere around 9%... i was amazed... how is it so high... I thought it was one of 2 types of debt that COULDNT be defaulted out of.. why would it be that high?
Post Wed May 15, 2013 8:39 pm
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clydewolf
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quote:
Originally posted by Dubya123
Thanks for all the quick replies..

The roth is probably the oldest of the accounts and ive been putting money in that since highschoolish age (or thereabouts)..birthday money, graduation money etc was all put in this account.... parents matched 100% of what i saved from working during the summers.

That sounds like you may have some unqualified money in your ROTH IRA. We can contribute only earned compensation or alimony to our IRA. The amount is the lesser of earned income/alimony or the limit for the year's contribution.

Gifts are not qualified for IRA contributions.
quote:

How about 529 options for myself? is that worth a consideration?

Generally graduate schools fit the definition of an eligible institution for 529 plans.
you can learn more in IRS Pub 970, starting on page 52: http://www.irs.gov/pub/irs-pdf/p970.pdf
Post Thu May 16, 2013 1:40 am
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Dubya123
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Aside for the possible unqualified contributions. With these updates, does the above suggestions change?
Post Thu May 16, 2013 2:15 pm
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oldguy
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quote:
At this point-I'm hearing that i should ignore the 401K work option as far as funding... I know for sure that my employer doesnt match anything of substance.


Dub - it might be time to go to a 401k/IRA website and read the rules. It appears that you are mixing qualified and unqualified money into both your Roth & your TIRA.

Eg, if you have a 401k available you cannot deduct your TIRA contribution. (And there is no point to contributing to a TIRA if you can't deduct it becasue you'll pay full ordinary tax when you sell it instead of the favored cap gains)

And the Roth contributions that came from unearned income (dividends, gifts, etc) will be hard to sort because they are growing earnings within your Roth. Plus, if you are unable to catch them, the IRS will do it for you when you sell - and the penalty is 50%.
Post Thu May 16, 2013 2:51 pm
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Dubya123
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old guy- isnt there a income threshold associated with the tax deduct-ability of TIRA's? Do you know what this limit is?
Post Thu May 16, 2013 6:35 pm
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oldguy
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quote:
For 2013 the phaseout range for deducting an IRA contribution when you are covered by a retirement plan at work are as follows:
•For single filers: $59,000 to $69,000
Post Thu May 16, 2013 8:00 pm
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Dubya123
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Is that net/gross/adjusted? Obviously this is area that i'm not too familiar with.. I thought it was some type of modified adjusted amount... I vaguely recall walking through this with my accountant.
Post Thu May 16, 2013 8:53 pm
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