Borrowing from 401 K

[dcfromva]

Thanks everyone! Brandie -I bookmarked that website- thanks!
We do have some money saved for college -but not enough and I was wondering about my options. So much of it depends on where they go.
Do people usually apply to where they want -and then figure out the money after they are accepted? Or apply based partly on where they can afford?

Are you a resident of Georgia? Georgia has quite a scholarship program (from what I've read). Georgia's HOPE Scholarship and Grant Program/ I believe the student has to maintain a 3.0 GPA (the web site has the specifics) in order to qualify for the HOPE Scholarship. (This would make college a little more affordable.)

From the web site.
HOPE Scholarship
If you are a Georgia resident enrolling in a degree program at a Georgia public college, university, or technical college, you may be eligible for the HOPE Scholarship. Recipients must demonstrate academic achievement by earning and maintaining a 3.0 grade point average. The award at public institutions covers tuition, HOPE-approved mandatory fees, and a book allowance. If you wish to enroll in a Georgia private college, you may be eligible for a $3,000 per academic year scholarship for full-time study or $1,500 for half-time study (6-11 hours). Click here for a history of the HOPE program and HOPE facts and figures.
HOPE Grant
If you are a Georgia resident enrolling in a certificate or diploma program at a Georgia public college, university, or technical college, you may be eligible for the HOPE Grant regardless of high school graduation dates or grade point averages. The HOPE Grant covers tuition, HOPE-approved mandatory fees, and a book allowance.

Link GA College 411 (for an idea of current costs)

 

[HeyIt'sMe]

I haven't read all the previous posts yet.

I was just watching Suze Orman on Larry King Live yesterday and she said to NEVER borrow against your 401(k) because you'll end up paying taxes twice.

First time - 401(k) loan payments are after tax so you pay taxes then
and
Second time - Taxes are paid on that money again when withdrawn (at retirement)

Of course, if you end up not paying back the loan (say you leave your current employer) you'll pay taxes and a penalty on the withdrawal.

 

[MrsPete]

Thanks everyone! Brandie -I bookmarked that website- thanks!
We do have some money saved for college -but not enough and I was wondering about my options. So much of it depends on where they go.
Do people usually apply to where they want -and then figure out the money after they are accepted? Or apply based partly on where they can afford?

It needs to be a little of both. I'd suggest discussing what schools the child is interested in attending, then visiting to see if it's really what he or she thinks it's going to be. Then have a serious talk about how much it's going to cost, how much you can pay, what you expect the child to come up with on his or her own, etc. Don't forget to include housing, clothing, insurance, and other things of that nature in the discussion.

It's not wrong to say, "This is how much we can provide, and these are the schools available in that price range." You're not obligated to over-extend yourself so that your child can attend an expensive school, and it's kinder to be upfront about what's really on the table.

You can get a fair idea of what federal financial aid (if any) you might expect to receive. Scholarships and private schools' aid are wildcards; you may not know until late in the senior year just what's going to pop up. Be careful to see whether the scholarship /aid is JUST for the freshman year, or whether it's renewable. You don't want to make a choice that'll be inexpensive for JUST one year.

MANY -- if not most -- of my best high school seniors narrow their school decision down to two schools (maybe three) fairly early in the year, then make their final decision after the numbers come in. I think it's a stressful thing for them to have that decision still up in the air as the weeks count down towards graduation, but it's the way the world works.

 

[MOMTOCUTESTDOGEVER]

No, that's not true.

It's essentially impossible to avoid paying back a 401K loan. If you remain employed, the employer deducts it from your paycheck -- you never write an actual check. And if your employment is terminated, the employer is allowed to withhold the unpaid amount from your 401K rollover. Most companies won't allow you to borrow 100% of your funds, so it's virtually impossible for you to walk away "owing" the company. If you did manage, they have your SS# and they can garnish your wages!

No, the penalties aren't in place to assure the company of repayment!

If you leave the company and cannot repay the loan, they will not garnish your wages. They will issue you a 1099 indicating that you withdrew funds from the plan, and you will be required to pay taxes and penalties on the loan. Also, the repayment of the loan depends on the plan--some companies have it built in to automatically deduct from your check and some don't.

 

[lori1043]

We borrowed off of my Dh's due to my DD's illness that had me stay home for over a couple years. I had worked 3 days a week and made pretty good income-we were scared-used some school loans(DH was in for his masters) to live off of and borrowed 16k of his 401K to pay off CC's and a car loan-so it would be a little easier. He regrets it though, every time he sees the amount in it, he expresses how it could be $20,000 more by now if we didn't use it. I just think our heads were a bit fuzzed by our kid having cancer and now we will be paying back these school loans for what feels like forever. The 401K is paid back though- some of the school loans were put toward that, but mostly income tax returns, etc went to pay it off. We did nothing extravagant, but having a kid with cancer just threw off all of our financial plans!! I guess God had different plans than we did!

I made the H-A-R-D decision that after this next WDW trip, my vacation savings is going to that loan-we are tired of paying for our past! It's gonna' hurt!

Lori

 

[KarenAylwood]

If you leave the company and cannot repay the loan, they will not garnish your wages. They will issue you a 1099 indicating that you withdrew funds from the plan, and you will be required to pay taxes and penalties on the loan. Also, the repayment of the loan depends on the plan--some companies have it built in to automatically deduct from your check and some don't.

Do you know when the 1099 is issued? Would they issue it when tax season hits at the beginning of the year, or would they issue it right after your employment is terminated?

The only reason I ask is that I remember my friend saying he had a $9,000 loan out on his 401K. He stopped working at his former employer a few weeks ago and started at a new company and is rolling over his 401K to his new company.

I'm guessing this means that he'll be served with a 1099 that would tell him he is required to pay $900 and whatever taxes. Correct?


Regardless of the penalties, I still think it's important to keep your money in your 401K and look for other routes to save for college. Helping pay off student loans at a lower interest rate would be better than using money that could have been making 9-10% in a 401K. Each year your DD can also apply for scholarships to help out, on top of whatever fiancial aid is offered.

For the poster who said that paying for college teaches financial responsibility:

I was one of those kids whose parents paid for ALL of college. Just because it was all covered doesn't mean I haven't learned financial responsibility. I understand what a wonderful gift I was given. I was told I was on my own after undergrad, and found a Masters program that would pay my way. I found a job a month after completing the second degree and a year and a half later I have a 401K, a Roth IRA, no debt whatsoever and enough in an emergency account to live off for almost a year. If your kids are taught good values and financial responsibility throughout their childhood, they can still end up responsible no matter what they've been given.

I agree that some kids need the lesson of paying part of their way through college (I know a large number who should have gotten it) but you know your child best. I'll always been incredibly thankful for what my parents have given me. I think it's admirable that the OP wants to help their children through college. But even after all I've said- I would NEVER want my parents to have to borrow against their retirement to pay for my education.

 

[MOMTOCUTESTDOGEVER]

Do you know when the 1099 is issued? Would they issue it when tax season hits at the beginning of the year, or would they issue it right after your employment is terminated?

The only reason I ask is that I remember my friend saying he had a $9,000 loan out on his 401K. He stopped working at his former employer a few weeks ago and started at a new company and is rolling over his 401K to his new company.

I'm guessing this means that he'll be served with a 1099 that would tell him he is required to pay $900 and whatever taxes. Correct?

The 1099 will be issued by January 31st next year for inclusion in his 2007 tax filing. And you are correct about the penalty of $900, plus taxes.

 

[cymomtx]

http://www.401khelpcenter.com/loans.html

that's a pretty good summary.


#1 Reason -- you can get financial aid and loans to pay for college. You cannot get financial aid and loans when you are 85 years old and not working. Never sacrifice your retirement planning for your kid's college.

Also remember, if your employment terminates for any reason, the loan becomes due in full or it is subject to the 10% penalty + taxes.

That is not always true, it depends on how the plan is written. My husbands plan allows you to make loan payments after separation from the company.

If I'm going to take out a loan I would rather pay myself the interest then someone else and I still have control of the money.

 

[Nicsmom]

When you take a loan from your 401(k), you do not pay taxes or 10% penalty. You make payment, usually, through payroll deduction (using after tax $s). If you leave the company/plan before the loan is paid back, you will usually be given the chance to pay it back in a lump sum payment. If you do not pay the loan back in full, the remaining balance is concidered taxable income in the year that it "defaults" which is usually the earlier of when you take the funds out of the account (lump sum or roll it over) or the last day of the quarter following the quarter that the last payment was received. I say usually because every plan is different. If you do default on the loan, you will see it as taxable income on your 1099R. If you are not 59 1/2 years old or older, you will be subject to a 10% penalty. The problem is that you are doubly taxed. You pay taxes on the repayments out of your paycheck and then again if you "default" or when you take distribution from your plan.

 

[clarabelle]

Thanks again everyone.
I know about HOPE- but I am always afraid it will disappear -I am afraid to count on it.
I really want to pay for my DDs college. My DH has lots of co workers that are still paying off student loans and I don't want that for them. I don't plan on paying all their expenses -I will make them get jobs for spending money and gas money etc...
I didn't have to pay for my college -although I didn't know what a blessing that was then -I do now.

 

[clarabelle]

dcfromva -thanks for the awesome links!!

 

[dvcgirl]

It needs to be a little of both. I'd suggest discussing what schools the child is interested in attending, then visiting to see if it's really what he or she thinks it's going to be. Then have a serious talk about how much it's going to cost, how much you can pay, what you expect the child to come up with on his or her own, etc. Don't forget to include housing, clothing, insurance, and other things of that nature in the discussion.

Good advise, and I just wanted to add that I think that parents really need to help their kids understand the concept of Return on Investment when choosing a college. College tuition has far outpaced the inflation index, wage increases and just about any other index you'd like to compare it to. It's one thing to come out of med school with 100K or more in loans, but not if you're an education major. Unfortunately, this kind of thing is happening more and more these days.

As for borrowing from the 401K, well I think it's a bad idea. You're giving up the compounding interest on the money you withdraw, and there can be big penalities, tax consequences. And I just think it's a slippery slope.....you do that once, it's easier the next time. That kind of thing. How do we know this? A full 50% of all people who move from one job to another don't roll their 401K over to an IRA or to the new employer's plan.....they spend it. I'd look to all other non-retirement sources first and/or take a look at your cash flow situation and see if you can't pay as you go.

 

[MrsPete]

Thanks again everyone.
I know about HOPE- but I am always afraid it will disappear -I am afraid to count on it.
I really want to pay for my DDs college. My DH has lots of co workers that are still paying off student loans and I don't want that for them. I don't plan on paying all their expenses -I will make them get jobs for spending money and gas money etc...
I didn't have to pay for my college -although I didn't know what a blessing that was then -I do now.

You're right to be concerned about any program disappearing -- it could happen any time. A back-up plan is always a good idea.

I paid every penny of my college education myself, and it was extremely difficult. Honestly, I worked harder than should've been necessary, and sometimes I lived /worked in places that genuinely weren't safe. Though it was worthwhile in the long run, I don't want my daughters to have to go through that same effort.

Good advise, and I just wanted to add that I think that parents really need to help their kids understand the concept of Return on Investment when choosing a college. College tuition has far outpaced the inflation index, wage increases and just about any other index you'd like to compare it to. It's one thing to come out of med school with 100K or more in loans, but not if you're an education major. Unfortunately, this kind of thing is happening more and more these days.

That's an excellent point. I think high school kids are getting a rather optimistic message about borrowing for college: from various sources, they're getting the idea that borrowing for college is a good choice - it's "good debt". It builds credit history, and it'll be easy to pay back because you'll be making $$$$$ after you graduate. They're getting a very one-sided version of student loans. They are NOT hearing that if you go to college for a year, then drop out (as nearly 50% of students at 4-year universities do), they still have to pay back the money -- and that one year of college will not help them get a job much better than they could've had with just the high school diploma. As you indicated, they are NOT hearing that all 4-year degrees do not qualify one for a high starting salary; in fact, very few people start where they expect and quite a few people struggle a long while before finding a job in their field. Finally, they are NOT hearing that student loans will cut deep into their paychecks for quite some time; they're not anticipating that they'll live in an apartment instead of a house, etc. They're making the choice to borrow $$$$ before they have a firm grasp on just what that means for their financial futures.

 

[Oreo Cookie]

I heard it was a bad idea because you are paying it back with money that's already been taxed, to only have it taxed again when you retire.

This is what I thought too, and Suzy Orman mentione it last week when she was on Larry King Live. She said that you borrow from your 401K and when you pay it back you are paying back with taxed income. Later in life you take out that money, and it's taxed again.

 

[LuvIt]

DO NOT BORROW ON YOUR 401K!!!!
You end up paying taxes twice on the money, plus you pay a penalty for getting it early, plus it is for your retirement and there are other ways for a student to get college funds (loans, getting a job, work study, taking classes online or at community college, grants, etc.)
Read some of Suzie Orman's stuff (get books at library) and also try Googling for more info.

 

[eliza61]

I read somewhere that this was not a good idea -but I can't remember why.
Has anyone done this before? We are not planning on it anytime soon -but we have considered it to help pay for college for our DDs
TIA

We did it to purchase a new car. Our old car (11 years old) had died. I didn't want to take out a automobile loan and my plan still allows me to save while I'm paying the loan back. The intrest was way lower (3%) than any other loan on the market and it was paid back into my 401K. I know the financial gurus frown against it but then again they're not living my life so it worked for me.

 

[eliza61]

DO NOT BORROW ON YOUR 401K!!!!
You end up paying taxes twice on the money, plus you pay a penalty for getting it early, plus it is for your retirement and there are other ways for a student to get college funds (loans, getting a job, work study, taking classes online or at community college, grants, etc.)
Read some of Suzie Orman's stuff (get books at library) and also try Googling for more info.

Wait. Only if you default on the loan. It's a loan not a withdrawal. OP definitely check with your plans rules to make sure.

 

[clarabelle]

You guys have talked me out of it for sure. I did want to add however -that we would not have been sacrificing our retirement -really -by the time they get in college it will be pretty big.
Thanks again for all the input.

 

[Hedy]

http://online.wsj.com/article/SB119162722016150793.html?mod=hpp_us_personal_finance

I thought this was a timely article.

 

[crisi]

You guys have talked me out of it for sure. I did want to add however -that we would not have been sacrificing our retirement -really -by the time they get in college it will be pretty big.
Thanks again for all the input.

If that is the case, how about moving your current 401k contributions to a 529? If you feel pretty comfortable with the amount of money you'll have at retirement, it doesn't make a lot of sense to continue to fund it when the money could be used somewhere else