Trying to figure out best thing to do with 401k

[ReneeM]

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I’ll have $10-11K fully vested in my 401k by this spring. From my understanding, when I quit my job I’ll have to move these funds.

Would I save on conversion taxes if I transfer my 401k to a traditional IRA and then (when I have no income in the future) roll it over to a Roth IRA?

Also do educational costs count as an exemption even if the IRA is less than 5 years old?

Lastly, is it better to leave all of that money in a retirement account or to use those funds to take out fewer loans given that I doubt the IRA will be earning a higher interest rate than federal graduate loans charge?

I know it’s kind of early for this planning, but it’s a good distraction from waiting to hear from schools. Thanks for your input!

 

[sazerac]

I’ll have $10-11K fully vested in my 401k by this spring. From my understanding, when I quit my job I’ll have to move these funds.

Would I save on conversion taxes if I transfer my 401k to a traditional IRA and then (when I have no income in the future) roll it over to a Roth IRA?

Also do educational costs count as an exemption even if the IRA is less than 5 years old?

Lastly, is it better to leave all of that money in a retirement account or to use those funds to take out fewer loans given that I doubt the IRA will be earning a higher interest rate than federal graduate loans charge?

I know it’s kind of early for this planning, but it’s a good distraction from waiting to hear from schools. Thanks for your input!

You might not have to take your 401k with you. It is probably a good idea to take it with you anyway, because it likely has higher fees and fewer options than a traditional IRA.

There are no taxes to convert a traditional 401k to a traditional IRA. Your IRA company will give you the forms to make this painless.

There would be taxes associated with converting the traditional IRA to a Roth IRA. Doing this in a year with no other income would be very financially astute.

I can't comment on soending IRA money on education... I just know it is a bad idea to take IRA money out for any reason.

Mathematically it is likely that you would come out slightly ahead if you could withdraw that IRA money penalty free and use it to avoid taking out higher interest loans for school.

Psychologically I think it is a very bad idea to get comfortable with raiding retirement funds for current needs. I have always sided with the idea that it is better to obtain and repay the loans and keep the mindset that retirement funds are a one way street - money goes in to IRAs and not out. Not touching the IRA would cost you a few hundred dollars a year in interest for a few years but I believe it will get you in the habit of saving saving saving which is a behavior that will create hundreds of thousands over a lifetime.

My opinion may not be popular here, but it is my own.

 

[ReneeM]

You might not have to take your 401k with you. It is probably a good idea to take it with you anyway, because it likely has higher fees and fewer options than a traditional IRA.

There are no taxes to convert a traditional 401k to a traditional IRA. Your IRA company will give you the forms to make this painless.

There would be taxes associated with converting the traditional IRA to a Roth IRA. Doing this in a year with no other income would be very financially astute.

I can't comment on soending IRA money on education... I just know it is a bad idea to take IRA money out for any reason.

Mathematically it is likely that you would come out slightly ahead if you could withdraw that IRA money penalty free and use it to avoid taking out higher interest loans for school.

Psychologically I think it is a very bad idea to get comfortable with raiding retirement funds for current needs. I have always sided with the idea that it is better to obtain and repay the loans and keep the mindset that retirement funds are a one way street - money goes in to IRAs and not out. Not touching the IRA would cost you a few hundred dollars a year in interest for a few years but I believe it will get you in the habit of saving saving saving which is a behavior that will create hundreds of thousands over a lifetime.

My opinion may not be popular here, but it is my own.

Good point about not getting comfortable with using retirement saving early...I hadn't thought about that.