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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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Im in my final year of school and Im dropping down from full-time

Resolved Question:

I'm in my final year of school and I'm dropping down from full-time to part-time at my current job. I plan on cashing out of my 401k and moving it into an IRA account. With the check I get for my 401k I wanted to cover my tuition and books for my final year. Do you know what kind of penalty this will cost me?
Submitted: 11 months ago.
Category: Tax
Expert:  Lev replied 11 months ago.

Lev :

Hi and welcome to Just Answer!
The best way to move funds from 401k to IRA account - is a direct rollover. That is because in this case there will not be any tax withholding.

Customer:

And should I remove the money to pay for school and book after it's already in the IRA account?

Customer:

Do you know what kind of penalty of tax penalty I face for doing such?

Lev :

Distribution from tax deferred retirement account is subject of income tax - means - the distributed amount will be added to your other taxable income. Distributions received before age 59½ are subject to an early distribution penalty of 10% additional tax unless an exception applies.

Lev :

Certain exceptions to this 10% additional tax related to distributions from 401k plan are listed on this page - http://www.irs.gov/taxtopics/tc558.html

Customer:

Would an exception apply in this case? I'm heard that can be the case with taking money out to pay for an education?

Lev :

If you will receive a check - to qualify for the tax free rollover - funds MUST be contributed to your IRA account within 60 days.

Lev :

The amount of qualified higher education expenses may be used as a exemption from 10% penalty for distributions from IRA account. But that exemption doesn't apply for distributions from 401k.

Lev :

The exemption may be used only to avoid penalty - distributed funds still will be added to your taxable income.

Lev :

Details about this exemptions - see IRS publication 970 - page 56 - http://www.irs.gov/pub/irs-pdf/p970.pdf

Customer:

So after it's added to my taxable income I'll be completely clear and free of all penalties for the money I take out?

Lev :

For purposes of the 10% additional tax, these expenses are tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution.
You need specifically claim that exemption on your tax return.

Customer:

So I definitely want to roll over my 401k into an IRA account and then take out the money to pay for school from the IRA account? Did I read that right, that the IRA gives the education exemption, not the 401k?

Lev :

Yes - that is correct understanding.

Lev :

You will use Form 5329 to claim that exemption. The form must be included with your tax return.

Lev :

I need to step out for some time.
Please review IRS publication 970 referenced above - and let me know if any clarification needed.

Customer:

Ok, my last question. Is there a certain amount of days I would have to wait once my money from my 401k rolls over into the IRA that I have to wait? Or can I request to take money out immediately?

Customer:

Thanks for the help

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22645
Experience: Taxes, Immigration, Labor Relations
Lev and 7 other Tax Specialists are ready to help you
Expert:  Lev replied 11 months ago.
Specifically for 401k rollover - there is no time limit.
As soon as funds are rolled over to the IRA account - you may request the distribution and claim an exemption if distributed funds are used for qualified higher education expenses.
As I mentioned above that is not an automatic exemption and you specifically should claim it on form 5329.

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