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Can I move my 401k to IRA and then withdrawal money without penalty to pay for education?

Forum|Forum|6 years ago
May 31, 2019
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I am currently pursuing business school and I was wondering if there is any issues with transferring my 401k to an IRA, and then withdrawing it immediately to pay off my tuition?

I do not want to pay the 10% withdrawal, but I understand I will need to pay off the withdrawal as normal income tax.

Is there a limit to the amount that I can pull out from the IRA? Is there a specific amount of time I need to wait? Am I required to pay back my IRA the money that I withdrew? What forms or documents should I be aware of when doing my taxes for this coming year?

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Best answer by dmertz

If your 401(k) permits distributions, say, because you are no longer working for that employer, you can transfer the 401(k) to an IRA to take advantage of the higher education-expense exception to the early distribution penalty available for a distribution from an IRA that is not available for a distribution from a 401(k). There is no minimum time that the funds must remain in the IRA before making a distribution from the IRA. You are not required to "pay back" any money withdrawn from an IRA. If you choose to, the only way to put money back into an IRA is to roll over some or all of the money to another IRA or back to the original IRA within 60 days, and only one IRA distribution from any of your IRA accounts can be rolled over in a 12-month period.

When you make the distribution, the Form 1099-R will show an early distribution. After entering the Form 1099-R into TurboTax, TurboTax will give you the opportunity to indicate the amount paid for qualified higher education expenses in the same year as the distribution. TurboTax will show this amount on Form 5329 line 2 with code 08 as an amount exempt from the early-distribution penalty. Be sure to retain records showing the amount paid for education expenses in case the IRS questions the exception.

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dmertzAnswer

If your 401(k) permits distributions, say, because you are no longer working for that employer, you can transfer the 401(k) to an IRA to take advantage of the higher education-expense exception to the early distribution penalty available for a distribution from an IRA that is not available for a distribution from a 401(k). There is no minimum time that the funds must remain in the IRA before making a distribution from the IRA. You are not required to "pay back" any money withdrawn from an IRA. If you choose to, the only way to put money back into an IRA is to roll over some or all of the money to another IRA or back to the original IRA within 60 days, and only one IRA distribution from any of your IRA accounts can be rolled over in a 12-month period.

When you make the distribution, the Form 1099-R will show an early distribution. After entering the Form 1099-R into TurboTax, TurboTax will give you the opportunity to indicate the amount paid for qualified higher education expenses in the same year as the distribution. TurboTax will show this amount on Form 5329 line 2 with code 08 as an amount exempt from the early-distribution penalty. Be sure to retain records showing the amount paid for education expenses in case the IRS questions the exception.

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TaxGuyBill

As a side note: In the event the 401k is with your current employer and you want to try to take a "hardship" distribution from it, you can NOT roll it over into an IRA.

@dmertz , please correct me if I'm wrong.