This is not true. There is no allowance for penalty-free "early distributions" from 401(k) plans to fund education expenses. IRA accounts allow you to do that, 401(k) plans do not.
falibay wrote:
Is anyone planning to tap into their 401K. I heard that there is no penalty when you make a withdrawal for education expenses and it may make sense to withdraw in our second year when our marginal tax rate is very low. Any take on that?
You need to consider the fact that based on historical data, a broad market stock fund over the long term could potentially offer a return significantly higher than the 8.5% fixed rate that GradPLUS loans are going at. If you intend to repay your loans over, say 10-15 years, rising inflation will further keep your
fixed interest costs manageable and your 401(k) could return in excess of 8.5% each year. Also, as Jerz pointed out, selling your 401(k) balances now mean you're locking in your losses and essentially making yourself start all over from scratch as far as retirement investing is concerned. If you intend to repay your student loans much sooner, and can get a private education loan with no fees and one that is 250 to 300 bps cheaper than the GradPLUS, then by all means consider that option.
falibay wrote:
If you can borrow cheaply yes. From what I understand, Gradplus loan are around 8.5% and a 4% origination fee, so unless you can get better than that in the market, it is worth thinking about tapping stocks or 401K, especially if you went from a high marginal tax rate to a low one in your 2nd year.