Using a 401k to finance med school.

[Obnoxious Dad]

This strategy may work for non-traditional students that have worked for a few years and put some money in a 401k.

After leaving your job for med school you make a trustee to trustee rollover of your 401k into an IRA. After that you take the money out of the IRA at a rate not to exceed the greater of $24,700 per year or your educational expenses. Assuming that you have no other income, you would avoid the 10% penalty for early IRA withdrawals AND you would qualify for the lifetime learning credit. This would leave you with zero federal tax liability and reduce your borrowing through the worst programs like Grad Plus.

Before you go off and fulminate about tax free appreciation in your IRA/401k remember that your income following residency may be too great to deduct the interest on your med school loans. This makes the tax free appreciation a non-issue.

This only works if Congress keeps extending the Lifetime Learning credit. Please also note that you won't avoid the penalty if you take the money directly from your 401k. You must do the rollover first!

Has anybody considered this strategy?

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[AndyFromMDTAXES]

As a CPA working with healthcare professionals, I see a similar strategy where a parent owns a medical or dental practice, and then "employs" thier college age child. The child then uses the money received as salary to pay for tuiton.

The parent writes off the salary paid to the child as an expense of their practice. And the child claims the Lifetime Learning Credit to offset the federal income taxes due on the wages earned.

There is a cost to this strategy. In most cases, Social security and Medicare taxes will be owed on the child's wages at a rate of 15.3%. But the tax savings far outweigh this cost.

Finally, caveat employer. You're only supposed to pay your child a fair wage for services actually performed.

 

[IceMan0824]

As a CPA working with healthcare professionals, I see a similar strategy where a parent owns a medical or dental practice, and then "employs" thier college age child. The child then uses the money received as salary to pay for tuiton.

The parent writes off the salary paid to the child as an expense of their practice. And the child claims the Lifetime Learning Credit to offset the federal income taxes due on the wages earned.

There is a cost to this strategy. In most cases, Social security and Medicare taxes will be owed on the child's wages at a rate of 15.3%. But the tax savings far outweigh this cost.

Finally, caveat employer. You're only supposed to pay your child a fair wage for services actually performed.

I have thought about this strategy to fund my children (if/when) Roth IRA, but never thought about applying the lifetime learning credit also.

Thanks AndyfromMDTaxes. If you have any more words of advice, please feel free to write.

 

[etf]

i figure that my investment returns in the long run will be greater than the non-inflation indexed interest rate i'll be paying on my future loans by a reasonable margin, so i probably won't be employing that strategy. hopefully with all these fed cuts sallie mae will get her act together and bring down rates to 1-3%, and then the decision will be made for me.

 

[Tenesma]

well you have to also look at specific risks of asset protection

your IRA and 401K is protected from creditors to a certain extent

now you are depleting something that is protected to finance something that may confer a short-term tax advantage and interest advantage

from a malpractice point of view it is a lot better to be 100k in debt for med school with 500k in the 401k instead of

no debt and 400k in the 401k...

keep that in mind

sometimes having debt (while not always pretty) is actually good and safe...

except some weasel lawyers can sometimes append your future income into a settlement (but they still can't touch future contributions from a 401k)

 

[Soundwave]

I wouldn't touch your 401k unless you have to borrow private loans. Even then, it's a toss up. You should max out on the subsidized loans and max out on the unsubsidized loans before you touch your 401k because the interest you make off the 401k should exceed your interest on the loans. You should be able to make it through school through the federal loans/financial aid/school loans if you go to a state school or a generous private school.

 

[mshheaddoc]

I wouldn't touch your 401k unless you have to borrow private loans. Even then, it's a toss up. You should max out on the subsidized loans and max out on the unsubsidized loans before you touch your 401k because the interest you make off the 401k should exceed your interest on the loans. You should be able to make it through school through the federal loans/financial aid/school loans if you go to a state school or a generous private school.

agreed. I didn't touch my 401K for post bacc even wtih private loans.

 

[Twitch]

+1 on leaving retirement instruments alone. It's much harder to put back in than it is to take out.

 

[monkeygirl09]

If this thread is still alive and this is an appropriate place for the question..

I'm applying this cycle and have been working full time for a year. My question is how savings in a 401k is looked at when financial aid packages are decided upon. Would it be beneficial for me to dump a bunch of money into the 401k instead of leaving it in a savings account where I would be expected to spend it on tuition/living expenses?

 

[Sol Rosenberg]

If this thread is still alive and this is an appropriate place for the question..

I'm applying this cycle and have been working full time for a year. My question is how savings in a 401k is looked at when financial aid packages are decided upon. Would it be beneficial for me to dump a bunch of money into the 401k instead of leaving it in a savings account where I would be expected to spend it on tuition/living expenses?

Nope, it all goes on your FAFSA.

 

[The White Coat Investor]

Plus you'll probably need it for tuition and living expenses.

It isn't like the system is horribly unfair. You don't really want more loans than they'll give you anyway and no one is going to give you any need-based grants or scholarships for med school.

 

[monkeygirl09]

Plus you'll probably need it for tuition and living expenses.

It isn't like the system is horribly unfair. You don't really want more loans than they'll give you anyway and no one is going to give you any need-based grants or scholarships for med school.

Does anyone get need-based grants or scholarships for med school?

 

[gman33]

If this thread is still alive and this is an appropriate place for the question..

I'm applying this cycle and have been working full time for a year. My question is how savings in a 401k is looked at when financial aid packages are decided upon. Would it be beneficial for me to dump a bunch of money into the 401k instead of leaving it in a savings account where I would be expected to spend it on tuition/living expenses?

Retirement savings are not put on the FASFA as was stated above.
Unless you are talking about a very significant amount of money ($100k +), it probably doesn't matter. Ask the school FA office.

 

[TMP-SMX]

Does anyone get need-based grants or scholarships for med school?

Yes. If you are lucky. Often schools have some maximum EFC including parental income. Wayne's is 18k. You have to run the numbers on EFC calculators with your parent's taxes. I lucked out this year and got 5k perkins and 9k board of gov scholarship. I got nothing but staffords last year.

 

[monkeygirl09]

Yes. If you are lucky. Often schools have some maximum EFC including parental income. Wayne's is 18k. You have to run the numbers on EFC calculators with your parent's taxes. I lucked out this year and got 5k perkins and 9k board of gov scholarship. I got nothing but staffords last year.

Thanks TMP-SMX and everyone for your input!