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Instead of Tapping 401(k), Seek Another Route to Son's Degree


Question: My son has just been admitted to a top college. At the same time, my employer decided to downsize, and I lost my job. Since I would like to give him the opportunity of a solid education, I am wondering whether I can use some money from my 401(k) without having to pay penalties and taxes.

Answer: You can't get a tax-free distribution from your 401(k). You got a tax break when the money went in, so Uncle Sam wants his due when the money comes out.

You can avoid penalties, however, by first rolling the money into an individual retirement account and then taking the distribution from your IRA. As long as the money goes for qualified education expenses--tuition, fees, books, supplies and equipment, plus room and board if your son will be at least a half-time student--you'll pay just the income tax due and not the 10% federal penalty.

Taking money out of your retirement funds is a pretty expensive way to go, however. Once you take out that money, you can't put it back. A $30,000 withdrawal could cost you nearly $150,000 in future retirement money, assuming it would have earned an average 8% a year for the next 20 years.

Here's a better plan: Alert the school's financial aid office of the change in your finances to see whether your son might qualify for more help. Also, talk to your bank about taking out a home equity loan. Borrowing against your home equity shouldn't be done lightly, but at least a home equity loan offers a tax deduction and probably will do less damage to your future finances.

For more information on paying for college, see Kristin Davis' book, "Financing College: How Much You'll Really Have to Pay and Where to Get the Money" (2001, Kiplinger Books).

Selecting Insurance for Long-Term Care

Q: After seeing my parents' life savings wiped out by nursing home costs, I've decided to purchase long-term-care insurance. One insurance company I'm considering has a Standard & Poor's rating of A- and offers a very attractive package. The other company has a rating of AA+ and offers a package that's not as good as the other. How much consideration should I give the companies' S&P ratings in my decision?

A: Unfortunately, there's no easy answer to that question. You must consider a number of factors when choosing long-term-care insurance.

You also need to be a smart shopper because some companies charge hundreds of dollars more than others for essentially the same policies, said long-term-care expert Bonnie Burns of California Health Advocates.

The good news is that your state insurance regulator probably offers some help. In California, the Department of Insurance posts information about such insurance on its Web site at

You also can order the department's long-term care guide for consumers by calling (800) 927-4357. The information applies only to California residents, but your state probably has a similar guide.

Retirement Planning

for Self-Employed

Q: My husband and I are self-employed, ages 36 and 33, and are fortunate enough to have $5,000 to $10,000 left over each month after bills are paid. We have $500,000 in life insurance and mutual fund investments, but we do not have any retirement accounts. I'm concerned about that, plus financing our children's education (they are 1 and 5), but we don't know anything about stock markets. What should we do with that extra cash so it will be there when we're ready for our early retirement?

A: Would that more people had your problems.

You're definitely overdue to start retirement plans, and as self-employed people you have more options and can salt away more money than most other folks. A savvy certified public accountant (which you should have anyway, being businesspeople) can review your options with you. One type of plan, known as a defined contribution plan, would allow you to invest 20% or more of your income for retirement. A traditional pension plan, which pays a set benefit in retirement, could allow you to put away even more.

You're also smart to start saving now for your children's education. Given your income level, you're unlikely to get financial aid when they're ready for college. You also should get a review of your insurance, credit and overall tax situation.

With the amount of money you have and the complexity of your needs, you probably will want to hire a financial planner for advice. You can find more information about how to do that at

You also should begin educating yourself so stock markets and investments aren't such a mystery. Good books to start with include Eric Tyson's "Personal Finance for Dummies" and Kathy Kristof's "Investing 101."

Liz Pulliam Weston is a contributor to The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at asklizweston@hotmail .com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries. For past Money Talk questions and answers, visit The Times' Web site at

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