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      11-23-2019, 08:40 PM   #1
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Use 401k to pay for school?

I'm just curious if this is a wise financial move.
I've got about $10K in there. Have not looked at cost of school. But lets assume coming out I'll be making more than I am now.
Took about 5 years to get that $10k putting in 3%. Company share is averaging $1k/yr.

What I'm looking at is that money in there is basically only growing from money put in, not from actual market growth. A faster return would be to make more, to put more in. I'm about topped out for pay, can gain maybe a buck or 2 but nothing significant. So to make more money I need a career change.

Using my 401 seems to be my best move near as I can tell.
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      11-23-2019, 08:50 PM   #2
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You lose 10% on top of taxes. You can borrow if you stay in the company and just have to pay it back. If I was young again I would put money in until it hurt now. Also if you’re not getting a good return look at the funds sand maybe make some changes, this has been a good year and 10% returns are achievable.
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      11-23-2019, 08:50 PM   #3
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I'm not familiar with the US and it's retirement savings plan, but if you have to pay tax on the money you take out it's probably not the best use of the funds.
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      11-23-2019, 09:07 PM   #4
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Agree with the other responses. Aside from the 10% fed tax and state taxes you will owe, you could just look into changing the investments that your money is in. Except ofcourse if your 401K fund is a really bad one and there arenít much options. Kind of disagree w what you said (no disrespect intended) about it not earning anything unless you put more, which kind of comes back to what funds it is invested in. I have not put money in mine since January of this year, it already earned at the very least $3700. This is just from the market being strong as it is now. Thatís also after the correction that happened beginning of the year.

In the end though, you ultimately decide what your money is worth to you. No one can tell you what is more important. Just my two cents.
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      11-23-2019, 09:11 PM   #5
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Not wise, for the reasons given above.

Other options:

- work for an employer with partial or full tuition reimbursement
- downsize your living expenses to pay for tuition for night school while working during the day
- the least desirable option, a student loan
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      11-23-2019, 09:26 PM   #6
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Depends on what school and what you'll study.
Regardless, unless it's an emergency I would not touch 401k funds.
Good luck!
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      11-23-2019, 09:28 PM   #7
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Quote:
Originally Posted by billnchristy View Post
You lose 10% on top of taxes. You can borrow if you stay in the company and just have to pay it back. If I was young again I would put money in until it hurt now. Also if youíre not getting a good return look at the funds sand maybe make some changes, this has been a good year and 10% returns are achievable.
Agree.
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      11-23-2019, 09:39 PM   #8
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Leave the 401K in there and take out a small student loan to pay for school.

I worked with a guy back in 1995 who cashed out his $15k 401k to pay for his soon to be wife's wedding ring. if he had left it in there and never touched it, never added to it, just let it sit for the past 25 years it would be worth $80,000 today with a modest interest rate.
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      11-23-2019, 09:58 PM   #9
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Stupid.

You can borrow money for school. You can't for retirement. That $10k will follow you and if you invest it in a blue chip stock with reinvested dividend it'll be worth a lot when you retire. Plain and simple.
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      11-23-2019, 11:11 PM   #10
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go with student loans, build your 401k. if it's a matter of repaying the student loans, you'll most likely be fine just paying the minimal amount - if it's federal loans especially. also, low interest rate means you don't need to pay it off immedately! it'd be nice to have it paid off, yes, but you'll be fine if you just make the minimum payments until you start earning more.
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      11-24-2019, 03:47 AM   #11
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Originally Posted by Turkish Pickle View Post
go with student loans, build your 401k. if it's a matter of repaying the student loans, you'll most likely be fine just paying the minimal amount - if it's federal loans especially. also, low interest rate means you don't need to pay it off immedately! it'd be nice to have it paid off, yes, but you'll be fine if you just make the minimum payments until you start earning more.
+1


It sounds like you don't have a lot of options in your 401K plan. Also if you are planning a career change, maybe you can find a position in another job related to the field you want to work in....and one that offers tuition assistance. You may have to sacrifice and start off with a few classes a week in the evening while still working this job, but it could open the door for you to another job after a year or two.

Even if you don't contribute anymore to that $10K you already have.....not touching it would still surprise you with what you end up with as you sound like you are still pretty young.

It may seem like you aren't earning a lot, but $10K isn't going to wow you with the returns you will see especially if you are locked within certain options.

Any plans what you may do? My daughter is in the medical field, and works with 2 year graduates out of technical school that make $50K+ a year in their respective careers, and they get the same benefits as my daughter does which includes a 7% 401K fund match that is fully vested after 5 years.

I agree also with what one poster said above.....contribuite to it almost hurts once you are in a position to do so. One of my Vanguard funds has earned slightly over $3K per month the last 4-5 months in a row after averaging it out.


Whatever you decide....I wish you all the best. At least you recognize the situation....and that you aren't happy with it. Most people will just settle and never take that step out of their comfort zone.
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      11-24-2019, 06:54 AM   #12
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Pay for student loans? Looking at the recent government policies, the odds that your loan will be forgiven by government decree are probably over 50% right now...and increasing daily if the liberals take the White House in 2020.

Let me also throw in the sticker price game in case you don't know it. Nobody pays sticker price for college/university tuition these days, except maybe community college students. Schools are so desperate for new students that the national discount rate averages over 50% at private schools. Oh, and stay away from for-profit schools, unless you like financial drama and scrambling to find another school that will except worthless credits when your choice of schools closes either due to financial insolvency or loss of accreditation.

More a note for parents of college-bound teens, but let me point out a tip that a friend who works at a college passed along to me years ago. Instead of paying for a dorm room and food plan, buy a two-bedroom condo or townhouse near the school. Put your kid in one room, and have them find a roommate to rent the other room. The rental income and money that you would have spent on dorm/food fees will more than cover the mortgage and utilities, and barring another 2008 real estate market correction the appreciation when you go to sell it at graduation might make a large dent in any outstanding student loan before the first payment is ever due.

Interesting story from a co-worker who recently retired. In the late 1970's, he worked a job when he was young where they had a mandatory 401(k)-like retirement contribution plan. Put in $1,500 total over two years, and forgot about the account. With the market growth through the years, he had $87,000 in that account when he retired in 2012! If you're in your 20's, that $10K could very well wind up being over half a million bucks if you don't touch it or contribute another dime.....
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      11-24-2019, 07:22 AM   #13
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I’d say no. The penalties for withdrawal are worse than paying interest on the loan. And there are several ways to get the loan paid off now. Have you shopped employers who will pay it off either in the form of a signing bonus, tuition assistance or some other payment structure?

The smarter move is to adjust your 401k to allow you to pay the loan off. You won’t be saving as fast but you’ll be protecting what you already have plus still putting a little in. If you are able to save the employer match, you’re doubling your money.

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      11-24-2019, 08:24 AM   #14
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To pile on. When you cash out any portion of your 401k that doesn't fall under any exemptions/approved withdrawal circumstances, not only are you going to be hit with an immediate 10% penalty on the amount you take out (so you're not going to get the full amount you had planned to take out), that money becomes ordinary income which is added to your current year's income total. Depending on where you fall in your tax bracket, this can also have a major tax implication.

As others have stated, it's always prudent to at least contribute enough to gain the full company match. That's free money and an immediate return before any stock market gains. While the scales are a bit different in the amounts we're talking about here, I have an IRA account at a financial institution. I have not contributed to it at all since creating the account in 2013. In 6 years, it's more than doubled in value where the beginning balance was in the 6 figures.

I was in your very situation when I was in my 20s. At a job that I didn't think would lead any where. Set my eyes on the exploding IT market. Decided I wanted a specific training path/certification. I worked with the education institution to break up the lumped sum payment they required to get the upfront payment discount into a few payments. Which I dropped onto a credit card and managed out the payments from there. Never touched my 401k and was able to get the classes paid off without too much of an interest hit. There are ways to make this work as others have provided suggestions. It just takes you to be creative and think outside of the box a little.

Edit: I actually think I remembered the penalties for taking out money from a 401k incorrectly. From what I remember, you get hit with a 20% automatic withholding from any amount you take out upfront. Then at tax time, you are hit with a 10% penalty on the total amount and then will have to pay taxes on that amount at ordinary tax rate when it's added to your total income for the year.
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      11-24-2019, 09:54 AM   #15
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More a note for parents of college-bound teens, but let me point out a tip that a friend who works at a college passed along to me years ago. Instead of paying for a dorm room and food plan, buy a two-bedroom condo or townhouse near the school. Put your kid in one room, and have them find a roommate to rent the other room. The rental income and money that you would have spent on dorm/food fees will more than cover the mortgage and utilities, and barring another 2008 real estate market correction the appreciation when you go to sell it at graduation might make a large dent in any outstanding student loan before the first payment is ever due.
my dad offered to do this, and i said no because i didn't want to live off campus, away from all the fun...

could've definitely used the cash, and over time we'd have a house "for the boys" instead of scrambling to sign leases
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      11-25-2019, 11:41 AM   #16
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First, Op you inadvertently told everyone what you make.

As everyone said, bad idea to use 401K for anything but your retirement.

Next, I will give you the best advise given to me when I first starting working and was presented with a 401K, had no idea what it was since I came from a Union and government/company paid pension family.

My uncle told me to max out the 401k and put in what I could (at the time that was $5000/yr today it is $19,000/yr). He also said that I would never miss it since I never had it and learn to live without that income. I have tried to max it ever since and i have never missed it.

The other piece of advise I would give you and this is what I have done for last 30 yrs which is to move your 401K to a rollover IRA when you leave a company. Most companies' 401K investment selection suck which sounds like your company's 401K falls into or you are putting your money into a money market not mutual fund considering even the worse investment are paying more than a money market.

In an IRA you can invest in the entire market not just the things your company has chosen to offer you.

I can tell you my Rollover IRA has done far better than any 401K I was in. I tend to invest in individual stocks verse Mutual funds, Mutual funds suck, the go up slow and crash quickly and take forever to recover when market tank. Most Mutual funds have a few good investment and many okay and number of bad.


I would recommend upping your contribution and look at what investing you have the money going into and see what you can do to improve the returns. In the last 5 yrs in decent investment returning half the what market did you should be up at least 50% from where you are.
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      11-25-2019, 11:47 AM   #17
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Never for tuition money! The only thing to cash a 401k in for is to buy a hot car.
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      11-25-2019, 11:52 AM   #18
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First, Op you inadvertently told everyone what you make.

As everyone said, bad idea to use 401K for anything but your retirement.

Next, I will give you the best advise given to me when I first starting working and was presented with a 401K, had no idea what it was since I came from a Union and government/company paid pension family.

My uncle told me to max out the 401k and put in what I could (at the time that was $5000/yr today it is $19,000/yr). He also said that I would never miss it since I never had it and learn to live without that income. I have tried to max it ever since and i have never missed it.

The other piece of advise I would give you and this is what I have done for last 30 yrs which is to move your 401K to a rollover IRA when you leave a company. Most companies' 401K investment selection suck which sounds like your company's 401K falls into or you are putting your money into a money market not mutual fund considering even the worse investment are paying more than a money market.

In an IRA you can invest in the entire market not just the things your company has chosen to offer you.

I can tell you my Rollover IRA has done far better than any 401K I was in. I tend to invest in individual stocks verse Mutual funds, Mutual funds suck, the go up slow and crash quickly and take forever to recover when market tank. Most Mutual funds have a few good investment and many okay and number of bad.


I would recommend upping your contribution and look at what investing you have the money going into and see what you can do to improve the returns. In the last 5 yrs in decent investment returning half the what market did you should be up at least 50% from where you are.

The first bold part I am in 100% agreement with. You can certainly find funds with much lower expense ratios as well as ETF's and individual stocks you cant get in a 401k plan.

The second part is a blanket generalization and is of course not true. All managed funds are not created equal and will vary greatly depending on the funds objectives, investments, and management.

One thing I have learned though is unless you are a sophisticated investor with the dedicated time to manage a portfolio and/or very lucky, its hard to beat the market. I have done MUCH better simply leaving my retirement money in overall stock market and/or sector funds/ETFs. I can dollar cost average in over time and dont need to worry about any individual companies which would require a watchful eye. I have used Vanguard as my brokerage for years which offers a slew of ETFs with minuscule expense ratios.
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      11-25-2019, 08:37 PM   #19
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It's a bad idea.

Are you certain that going back to school will net you higher pay in your field rather than just getting more experience under your belt.
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      11-25-2019, 08:40 PM   #20
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absolutely no. cashflow school. you'll be penalized on the withdrawal on top of being taxed at your normal tax rate. you'll be lucky to get 60% of that money. run a calculator of what that $10k will be in 30 years if you just left it alone.
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      11-25-2019, 09:39 PM   #21
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Just had a brilliant idea. Two words. Shuga mama or papi.
All kidding aside, I'm doubling down on "Don't touch that 401k".
You'll thank us in 30 years.
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      11-26-2019, 09:50 AM   #22
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The first bold part I am in 100% agreement with. You can certainly find funds with much lower expense ratios as well as ETF's and individual stocks you cant get in a 401k plan.

The second part is a blanket generalization and is of course not true. All managed funds are not created equal and will vary greatly depending on the funds objectives, investments, and management.

One thing I have learned though is unless you are a sophisticated investor with the dedicated time to manage a portfolio and/or very lucky, its hard to beat the market. I have done MUCH better simply leaving my retirement money in overall stock market and/or sector funds/ETFs. I can dollar cost average in over time and dont need to worry about any individual companies which would require a watchful eye. I have used Vanguard as my brokerage for years which offers a slew of ETFs with minuscule expense ratios.
I do not disagree if you do not have the time, find a few good ETF, but ETF is new investment vehicle, it did not exist 10 yrs ago. However, as I tell anyone it is your money and you need to educate yourself on where you are investing that money. I always hear people complaining about losing money in their retirements and they want to be upset with everyone else, I tell them they need to go no further than a mirror to find someone to blame. I am amaze at people lack of knowledge or even interest in where they are putting their money.

BYW, the problem with Managed funds, the manager could change at any moment, and the people who made it great may no longer be managing it. I was in Magellan fund in the late 80's early 90's when it was kicking ass double digit returns year after year, as luck had it I changed jobs and moved my 401K to another company and did not offer Magellan which turned out to be blessing since Peter Lynch left and the fund never performed like it did when he was there.

I have been through 3 down turns in the market, two big ones and a minor one. In the 2000 dotcom bust I did what everyone said, leave it as is and keep adding to your position (cost average down). This decline hurt since it went into the principle it was not just gains I lost (all the money I made in Magellan plus more). In 8 yrs after I never fully recovered what I lost in 2000. Come 2007/2008 when things starting going south again I did what everyone said not to do, sell off all the mutual funds and went into individual stocks.

In 4 short year I recovered everything lost from 2000 and 2008 and I am way ahead of where I would have been if I stayed the course. I have every investment I ever made since 1990 in Quicken and I know exactly what I owned back in 2000 and 2008 and I can look at the IRR or ROI and I looked at where those investment are today and what my net worth would look like if I stayed. It would not be close to where I am now.


I agree what I do takes work, but it is not as much as you think like 30 minutes a day to see what is happen in the markets and the companies I am invested in. I also work with a good broker who I can call any moment and get his inputs and make adjustments as needed.

Even ETF have bad investment mix in with the good, and the bad some time can drag down the over all good, when a company goes bad the market hammers them, stocks go down faster than they raise so I try as best I can to stay away from the bad companies. I do have a few ETF to help reduce risk, but my primary drivers are a hand full of stocks.
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