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Ask Dave

There's Probably A Better Way

Shelly is 40 and going back to school, but tuition is going to be $70,000 plus expenses. Would Dave recommend using retirement money to pay cash for school and avoid the early withdrawal penalty?

QUESTION: Shelly in Idaho is 40 and going back to school, but tuition is going to be $70,000 plus expenses. She worked previously and has $100,000 in an IRA. Her husband has $120,000 in one, too, plus a 401(k). She has $45,000 in a 401(k) she’s rolling to an IRA. Would Dave recommend using that money to pay cash for school and avoid the early withdrawal penalty?

ANSWER: The payback is pretty good in terms of what you’re spending for what you’re getting—$70,000 out for a $70,000 to $120,000 a year position. That’s pretty strong. You don’t have the cash to do it without doing pretty substantial damage to your retirement account. Whatever you take out is going to cost you lots of money. It’s going to cost you your tax rate, which is probably about 25–30%. If you pull out $40,000, it’s going to cost you $10,000. That’s pretty substantial. I’m not wild about cashing out retirement. In your case, he makes pretty good money. You should make good money when you’re done, assuming you follow through on this and you finish and graduate. What if we said we’re going to cash flow half of it and cash out that one IRA? We’re going to roll up our sleeves and live on nothing and pay for part of it out of lowered lifestyle and a really tight budget and part of it out of a little bit of retirement being cashed in.

I wouldn’t get loans. Let’s take loans off the table. I wouldn’t even think about getting a loan. If you’ve got to get a loan, I wouldn’t do the deal. Are we going to cash out enough retirement and/or cut lifestyle to do this, or are we just going to cash out retirement? I wouldn’t sell your home at a loss. You’re panicking here. There’s nothing driving this except your desire to do this. There’s nothing that says you’ve got to do it this year. You could do it next year. I don’t think I’m going to be writing a check to get out of a mortgage when you’re not in some kind of financial crisis—something driving that. There’s nothing driving that here except your desire to be out of debt and your desire to go to this school. I think you guys need to slow down a notch. If you can sell the house for enough to get out even and you want to move down into a cheaper rent, fine. No, I’m not writing any checks to do that. And no, I’m not using student loans.

What would I do if I were in your shoes? I would slow down, sell the house for at least enough to get out of it even, and I would take a little bit out of the retirement and take the tax hit on that. I would take the majority of your $35,000 a year that you need out of your $85,000 income by cutting your lifestyle to nothing to avoid cashing out retirement. I would sacrifice lifestyle to keep from giving up 25–30% of my retirement that you’re going to use. It’s much like you’re borrowing money at 30% interest here to go to school. Your passionate desire to do this on your schedule is costing your family a lot of money. I think the way you’ve set it up has been unwise.