Personal Investment & Financial Planning Q`s/401K/pension conversion for educational uses

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Question
Paul: I recently left state government service for graduate school. I had made tax-free contributions to both the state pension fund and a 401K. After leaving, I've moved my pension monies into the 401K. While one option is to roll the funds into my ROTH IRA, what I'd ideally like to do is use some of these monies to offset the costs of graduate school (via the 401K or some other financial vehicle(s)). Since the use is for educational purposes, I'm hoping to withdraw funds for educational use on a tax-free basis--is that at all possible given my situation? Thanks very much.

Answer
Hi Enrique,

Since your had made tax-free contributions to both the state pension fund and a 401(k), any withdrawals are subject to tax.  

On the positive side, the withdrawal will likely be treated as a penalty-free distributions. Only expenses incurred at certain educational institutions who participate in the student aid programs administered by the U.S. Department of Education are eligible. Additionally only eligible educational expenses such as tuition, fees, books and supplies are eligible for this treatment.

Wish you the best.

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Paul Sid, CPA CFA

Expertise

I am a CPA and CFA with more than 20 years of assisting others to address a wide variety of tax and financial issues, including: (a) tax and timing for conversion of various retirement vehicles including 401(k), traditional IRA, and Roth IRA; (b) starting date considerations for social security benefits and related tax liabilities; (c) computation of book and tax basis, gains and losses on investments, 1031 exchanges; (d) tax benefits and deductions on principal residence, vacation homes, and investment properties; (e) acquisitions of business properties, computation of bonus depreciation, and MACRS depreciation; (f) tax as related to various martial issues, including dependences, noncitizen spouses, and divorce settlement; (g) review of college funding options and tax attributes; (h) tax computation and investment considerations for fixed and variable annuities; (i) tax considerations relating to gifting by parents and grandparents; (j) tax on employee benefits programs including retirement plans, health insurance, and other benefits; (k) tax on inherited assets including assets, insurance, and other assets.

Paul Sid, CPA CFA
FinancialEdge.net

Experience

I have over 20 years of financial, accounting, and tax experience in working with individuals and fortune 500 companies. I am most interested in helping you to make better financial decisions.

Organizations
Financial Planning Association of San Francisco; Tax Executive Institute, Santa Clara Chapter

Education/Credentials
B.S. California State University, Los Angeles, CA CPA (California), CFA

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