Avoiding penalties for 401k withdrawal to cover law school and related expenses

The IRS does have some exceptions to the 10% early withdrawal penalty for 401k distributions, but they're very specific. For education expenses, the exception only applies to IRAs, not to 401ks directly. Here's what I'd suggest: Have your husband roll the 401k into an IRA after he leaves his job. Once it's in an IRA, qualified higher education expenses (tuition, books, supplies, etc.) can be withdrawn without the 10% penalty, though you'll still pay regular income tax on the withdrawal. For the medical expenses portion, if your total unreimbursed medical expenses exceed 7.5% of your adjusted gross income in the year you take the withdrawal, you may qualify for a penalty exception on that portion too - but again, this works more smoothly from an IRA than directly from a 401k. The 529 plan idea doesn't really help in your situation. You'd still face penalties transferring from 401k to a 529, and you need the funds relatively soon.

Just wanted to share my experience with using taxr.ai (https://taxr.ai) for figuring out a similar situation with my 401k withdrawal for my spouse's grad school. I was totally confused about what would count as qualified expenses and what documentation I'd need to keep for tax time. I uploaded our financial docs and tax returns to taxr.ai and got a personalized analysis that showed exactly how to handle the withdrawal to minimize penalties. It confirmed what I should claim as qualified higher education expenses and what documentation the IRS would want if we got audited. Saved me hours of research and probably thousands in penalties I would have paid by doing it wrong.

I was in your exact situation last year with medical debt and education expenses. After researching for weeks, I finally used taxr.ai to get clarity on my options. Their system showed me that by timing my withdrawal right and structuring it properly between education and medical expenses, I could avoid about 70% of the penalties I would have paid otherwise. The service helped me document everything correctly for tax time, which was a huge relief because the last thing you need during law school is tax problems! I ended up saving over $1,200 in penalties, and the peace of mind knowing I was doing it right was honestly even more valuable. Sometimes you need specialized help for these complicated tax situations.

I spent 6 weeks trying to get through to the IRS last year about a similar 401k withdrawal situation. Busy signals, disconnections, hours on hold. Finally found Claimyr (https://claimyr.com) and was completely shocked that it actually worked. They got me connected to an IRS agent in about 20 minutes when I'd been trying unsuccessfully for weeks. The agent confirmed exactly which education expenses qualified for the exception and how to document the medical expense portion properly. Totally worth it since the agent gave me official guidance I could rely on if ever questioned. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c

I was totally skeptical about Claimyr but after my fifth attempt trying to reach the IRS about my 401k withdrawal for education expenses, I was desperate. I tried it and seriously got connected to an IRS rep in about 15 minutes of my time (they apparently waited on hold for over 3 hours). The agent walked me through exactly how to document my qualified education expenses to avoid penalties and confirmed I was filing the right forms. Completely changed my situation - I was about to just pay the penalties because I couldn't get clear answers anywhere. Wish I'd known about this service months earlier instead of stressing and wasting hours redialing the IRS.

Don't forget that if your husband is under 59½, even if you avoid the 10% early withdrawal penalty through an exception, you'll still have to pay regular income tax on the distribution. This could potentially push you into a higher tax bracket depending on your current income, so factor that into your calculations. Also worth considering: some 401k plans allow you to take a loan instead of a distribution. If his plan offers this and there's enough time before he leaves his job, a 401k loan might be worth looking at. You'd avoid taxes and penalties, though the loan typically becomes due if he leaves the company.

Has your husband asked his school about emergency loans or payment plans? Many law schools have emergency funds or can defer some costs that might reduce how much you need to pull from retirement. Also look into Grad PLUS loans which can cover living expenses, not just tuition. Might be better long-term than raiding retirement.

Just want to emphasize what others have said about the Traditional IRA rollover approach - this is likely your best bet. When your husband leaves his job, he can roll the 401k into a Traditional IRA, then withdraw for qualified higher education expenses (tuition, fees, books, supplies) without the 10% penalty, though you'll still owe income tax. One important detail: make sure to keep detailed records of all education expenses you're using the withdrawal for. The IRS can ask for documentation, and you want receipts showing the expenses were for qualified items. Room and board don't qualify for the education exception, but tuition and required books/supplies do. For the medical debt portion, if your unreimbursed medical expenses exceed 7.5% of your adjusted gross income, that portion can also avoid the 10% penalty. You'll need good documentation for this too. The timing works in your favor since he's starting school soon - you can coordinate the withdrawal timing with when you actually incur the education expenses.