student tax planning advice

[mountainarrowhead]

Hey guys, I wanted to get some input as to some tax planning moves I should make before the end of the year. Here is my tax situation:

tax filing status = single
Age by end of year =33
total income for the year = $44000
401(k) contributions = $3500
HSA contributions = $1200
Tuition paid for masters program for year = $13000
No home, no dependents, not planning on making a ira contribution.

I have a loan of about $7000 from my 401 (k) and want to know if I should call my 401(k) and ask them to convert a portion of the $7000 for example $3000 (the amount greater than $10000 paid in tuition) as a withdrawal as I can offset the 10% early withdrawal penalty against the $3000 i wont be using for tuition tax benefits as i believe the max tuition consideration is $10000 per year . I have taken 10 credits in the spring and winter semesters and should be considered a full time student. Not sure if I can also deduct cost for rent etc being a student.

I am not certain if my 401(K) plan will let me convert the loan to a withdrawal as I probably do not meet the requirement for hardship etc. I have $2500 in a traditional IRA that I can withdraw and use to pay down the existing 401(k)loan. I plan on leaving my employer next year and dont want to be taxed for the full $7000 loan on my taxes next year. I am also not certain if I qualify for the Life Learning Credit.

I am a stock broker and i am doing a master in finance program. I also receive $10000 in tuition reimbursement from my employer in addition to my salary but my employer is coding the reimbursement as non taxable (does not qualify for a different position)


thanks in advance

Kim

[SnoopyCool]

The capped amount for reimbursement from employer that is not taxable is $5,250 per calendar year (Section 127 of the U.S. Internal Revenue Code). I'm not sure how to workaround this.

http://www.irs.gov/pub/irs-tege/fringe_benefit_fslg.pdf

This link gives insight into a hardship distribution. Considering the reimbursement, I don't think you'll qualify.
Retirement Plans FAQs regarding Hardship Distributions

The Lifetime Learning Credit phaseout begins at $52,000 for single filing status. Again, because I believe you'll have to count some of what your employer reimbursed you as income (and I could be wrong) plus your distribution, you're going to not qualify for this credit.
Publication 970 (2011), Tax Benefits for Education

There are other people on this board who are more qualified to give you advice, and I'm sure they'll chime in. This is just what I know about income taxes, based on what you said. Hopefully someone else will have the answer you're looking for.

Good luck.

[Bayspieler]

Student tax planning advice

Mountainarrowhead,

I don't think that you can do what you are describing. That $7000 loan is a just that, a loan. I don't think the company will let you default on a portion of it.

What your 401-K company may let you do is re-finance the terms of the loan so that you can pay it off sooner. You'd be making larger payments against the principal of the loan, but the money ends up back in your 401-K. Based on your numbers, you're contributing 3500/44000 = about 8% to your 401-K. Depending on how your employer match works, you could offset the extra payment by lowering your contribution down to 3% or whatever the maximum match level is. Remember, the money you pay against your loan goes back in the 401-K regardless. Once you get the employer match, the money you pay against the loan works just like the money you put in as part of the standard contribution.

I think the best thing for you to do tax wise is to have as little money left on that loan as you can when you default on it.

Best,