Page 1 of 1
Need advise for taking a loan for son's US education
Posted: Mon May 16, 2016 5:56 pm
by srikal
Hi,
I have a standard case, I think (However, I may not be just alone). Somebody might have passed through this scenario and thought they can bail me out with their wisdom/experience.
We left US in 2008. After my return to India, I have been working in India (MNC) all along. I have some money in my US 401K account (its in IRA account, not Roth though). So far I have not touched this money at all (after I left US).
Now, my son (USC/21 years) has just finished his undergraduate program and will be heading to US University (Duke) for his MS in this August. We are not expecting any scholarships/grants from Duke. So, I surely need some money (say around 30K) to support his MS program (in addition to any possible loans). [So far, my son never had any income and we have been filing taxes as joint account, including my two sons].
We consider the following options:
1. Take a loan against my 401K for my son's education?
2. Take a partial with drawl against 401K (penalty?)
3. Apply for a student loan with US Banks
(as a collateral, my credit history may be old/not current, no US income.
May need to request somebody in US to help us out)
4. Apply for a student loan in India with Indian banks (myself as a collateral).
Which option you would recommended and what would be tax implications?
Can you please help by sharing your thoughts / experiences / comments?
(Please let me know for any additional information).
Need advise for taking a loan for son's US education
Posted: Tue May 17, 2016 12:39 am
by indian
When you leave US employer, the 401K would be rolled over to IRA right? In your case are you still with same employer? If it is with same employer, you could check with employer for the loan. Otherwise, I doubt you can get loan from IRA. Best is to check with the custodian.
Need advise for taking a loan for son's US education
Posted: Tue May 17, 2016 12:54 am
by Desi
srikal;630898Hi,
I have a standard case, I think (However, I may not be just alone). Somebody might have passed through this scenario and thought they can bail me out with their wisdom/experience.
We left US in 2008. After my return to India, I have been working in India (MNC) all along. I have some money in my US 401K account (its in IRA account, not Roth though). So far I have not touched this money at all (after I left US).
Now, my son (USC/21 years) has just finished his undergraduate program and will be heading to US University (Duke) for his MS in this August. We are not expecting any scholarships/grants from Duke. So, I surely need some money (say around 30K) to support his MS program (in addition to any possible loans). [So far, my son never had any income and we have been filing taxes as joint account, including my two sons].
We consider the following options:
1. Take a loan against my 401K for my son's education?
2. Take a partial with drawl against 401K (penalty?)
3. Apply for a student loan with US Banks
(as a collateral, my credit history may be old/not current, no US income.
May need to request somebody in US to help us out)
4. Apply for a student loan in India with Indian banks (myself as a collateral).
Which option you would recommended and what would be tax implications?
Can you please help by sharing your thoughts / experiences / comments?
(Please let me know for any additional information).
401K withdrawal for higher education will attract a 10% penalty besides taxes.
If 401K is rolled over into an IRA, then a distribution from IRA for higher education does not attract 10% penalty, but it does still attract taxes.
Need advise for taking a loan for son's US education
Posted: Tue May 17, 2016 12:00 pm
by srikal
Srikal> Indian, thank you for your quick response and feed back. To your questions, I provided inline response below.indian;630947When you leave US employer, the 401K would be rolled over to IRA right?
Srikal> Yes, 401K has been converted into IRA.
In your case are you still with same employer?
Srikal> Yes, same company's India's devision (India Pvt. Ltd.)
If it is with same employer, you could check with employer for the loan.
Srikal> Okay, I am checking with my company's US arm as well.
Otherwise, I doubt you can get loan from IRA. Best is to check with the custodian.
Need advise for taking a loan for son's US education
Posted: Tue May 17, 2016 12:10 pm
by srikal
Hi Desi,
Thanks for the feedback.. I am glad that my 401k has been turned into Regular IRA when I left US.
So, if I take loan on my IRA for my son's education
- I will not have penalty
- but I will have tax implications. means it will add up to my income that I report to TRS for 2016.
- (My son will not have any tax implications).
Is that a right understanding? Can you please confirm my understanding?
Regards
Srikal
Need advise for taking a loan for son's US education
Posted: Tue May 17, 2016 6:42 pm
by Desi
srikal;630989
So, if I take loan on my IRA for my son's education
- I will not have penalty
- but I will have tax implications. means it will add up to my income that I report to TRS for 2016.
- (My son will not have any tax implications).
Is that a right understanding? Can you please confirm my understanding?
Loan is borrowing money. Taking a loan has no tax implications, nor penalty implications. You just have to return the loan with interest over time.
However, when one pays off the loan over time, one pays back interest and some principal in installments.
In USA, currently interest paid on personal loans is not tax deductible (it used to be some 30 years back).
However, you cannot take loan from an IRA. Loan from an IRA is not allowed. From 401K, loans can be taken but not from IRA.
From IRA, you can withdraw money out and that is called taking a "distribution". A distribution is not a loan. You just take out your money. Once you take the money out, you cannot go back and say you are returning money back to IRA (except within first 60 days, you can put money back with no interest) and that it was a loan. Money taken out of IRA is distribution taken out. It is your money.
The distribution amount you take is treated as ordinary income for taxation purposes and taxed accordingly.
Further if distribution is taken in a year in which you have not yet attained age 59.5 years or over, then there is a 10% penalty.
The 10% penalty gets waived if certain conditions are met. If the money is used for education of self, spouse or child, then the 10% penalty is waived. There are other conditions also that allow for such waiver like buying house for first time etc. Education expenses are specifically defined as tuition, books, etc. You can find more details at >>
https://www.irs.gov/publications/p970/ch09.html
Need advise for taking a loan for son's US education
Posted: Tue May 17, 2016 7:34 pm
by srikal
Thanks a ton Desi, that has cleared many doubts and made the job easy. Taking a loan is out of the equation now. So, I will work my IRA Account Holders to see if a distribution is something that I can workout. This is the ONLY option I can exercise on my retirement account funds.
Can you also comment about taking a bank loan by son and myself being loan collateral option?
Is that an option worth to pursue (considering the practical aspects of our family being away from US for the past 8 years)?
Regards
Srikal
[I am thinking to a) check what would be my credit score and b) myself getting Indian income will support US loan application by my son] OR should I request somebody for collateral]
Need advise for taking a loan for son's US education
Posted: Tue May 17, 2016 8:24 pm
by Desi
srikal;631007Thanks a ton Desi, that has cleared many doubts and made the job easy. Taking a loan is out of the equation now. So, I will work my IRA Account Holders to see if a distribution is something that I can workout. This is the ONLY option I can exercise on my retirement account funds.
Can you also comment about taking a bank loan by son and myself being loan collateral option?
Is that an option worth to pursue (considering the practical aspects of our family being away from US for the past 8 years)?
Regards
Srikal
[I am thinking to a) check what would be my credit score and b) myself getting Indian income will support US loan application by my son] OR should I request somebody for collateral]
Sure, loan is an option if you can get one or your son can get one. Do some research on higher education funding choices using Google.
Being in India, any income earned within IRA and any capital gains transactions would be taxable in India. I do not know if you have taken measures to report such over the last 8 years in India in your Indian tax filings. And then when you withdraw IRA money years later, it will be taxable in USA, thus having paid taxes to Indian govt and to US and there is no way to claim dual tax credits in such a case. So, a person who resides in India, it is generally a good idea to liquidate the IRA over time. The reason I say over time, because a certain amount of income is not taxed by US (exemptions and standard deduction for tax residents and a fixed exemption for NRAs). I do not know whether you are a USC or green card holder a Non resident alien for US purposes. Withdrawing money from IRA, I think would be better for you regardless of son's education needs. Ideally, the son should try to obtain a loan, if he can. As to IRA, regardless of loan by son or not, you should embark on a plan of liquidation to avoid double taxation on gains within IRA.
Need advise for taking a loan for son's US education
Posted: Tue May 17, 2016 8:39 pm
by Caramel
[INDENT]Did your son contact the financial aid office at Duke? Has he filled out FAFSA? For graduate schools, most students are eligible for Stafford loans (a combination of subsidized and unsubsidized). This should be sufficient to cover your son's whole education. Taking a loan for your kid's education from your 401K/IRA is a bad idea in my opinion. He is 21 and should be able to fund his own graduate studies. In the long run, this will help him make sound financial decisions. As a parent, realize that this is a teachable moment. Use this opportunity wisely. You're only responsible for his initial (settling down) expenses. He will need to have some skin in the game. Set his expectations right so he starts looking for opportunities to make money - part time jobs, assistantships, internships, coops etc. Good luck. Trust that he will do well.
[/INDENT]
Need advise for taking a loan for son's US education
Posted: Tue May 17, 2016 9:32 pm
by Lakshya
Caramel;631012[INDENT]Did your son contact the financial aid office at Duke? Has he filled out FAFSA? For graduate schools, most students are eligible for Stafford loans (a combination of subsidized and unsubsidized). This should be sufficient to cover your son's whole education. Taking a loan for your kid's education from your 401K/IRA is a bad idea in my opinion. He is 21 and should be able to fund his own graduate studies. In the long run, this will help him make sound financial decisions. As a parent, realize that this is a teachable moment. Use this opportunity wisely. You're only responsible for his initial (settling down) expenses. He will need to have some skin in the game. Set his expectations right so he starts looking for opportunities to make money - part time jobs, assistantships, internships, coops etc. Good luck. Trust that he will do well.
[/INDENT]
OP I was thinking in same direction. Your son is USC, he will definitely able to get all US govt education loan as well as some grants/financial help (Parents income will come very low in his case)... This is the right way to fund his education. Should avoid 401k or personal loan. His USC and zero US income of parents may work well in his case....