nink wrote:
If someone is subject to 35% tax bracket, then he/she can not contribute to IRA account (to begin with) due to income limitation.
If you qualify for hardship rule, then only thing you will have to pay are taxes and maybe 10% fee (only if adjusted qualified education expense is less than taxable portion of IRA distribution). But usually, you have to prove that you've exhausted all your other options before they will let you qualify for hardship rule.
That might be the tax maneuver.
401k doesn't seem to have contribution limit. Max out your 401k contribution this year, rollover to IRA next year and then make a withdrawal. It seems that you are still subject to 10% withdrawal penalty so you may save a tiny bit of money.
That being said, I'm looking at the income bracket matrix right now and it looks like the amount that you save by doing this maneuver is really not worth the cost as you get hit with the top marginal rate only if you make more than 373k.
On the other hand, you are making a guaranteed return of whatever the prevailing interest rate will be on your student loan...
It looks like a lot of trouble for not a lot of savings.
People who engaged in this maneuver mid-2007 would've made a killing however.
_________________