Help! What should I do?

[Guest student79]

I am leaving my job to start medical school in the fall. I have a 401k balance of $2000 (my employer matched dollar for dollar). I also have a Roth IRA of $500.

I have to withdraw all these funds for qualified educational expenses this fall. What should I do? I want to get the greatest benefit possible. Should I roll over the 401k to my Roth IRA and then make the withdrawal? Or should I just withdraw from the 401k and from the Roth IRA separately? I hear you can withdraw from your Roth as long as it is a contribution you made and it will be tax free and penalty free. I also heard about the qualified educational expenses. But then I think when I roll over the moeny from the 401k it might get taxed. Please someone offer me some advise on what scenario you think will provide me the most benefit.

Thanks,

Ben

[John G]

First, leave the funds in these accounts as long as possible. Perhaps you won't need to hit them in the Fall.... even if med school is expensive. If you can hold out till Jan 2006 you may also be in a lower tax bracket - depending upon what if anything you are paid at the bottom of the food chain in med school.

Roth - all contributions can be withdrawn at any time for any reason without penalty. However, you will owe a small tax on any earnings.

401k - no point in rolling it to a Roth. You can take a distribution - but you will get taxed on any part that is not "after tax contributions". Talk with your HR dept about your options. The governing rules of your specific 401k may constrain your choices.

[BPickerCPA]

If you withdraw money from your 401k you will owe the 10% penalty in addition to the tax. Only withdrawals from IRAs can be made penalty free for qualified education expenses.

[John G]

Rolling to a Roth triggers taxes. But he may have the option to roll to an IRA and then exit for college expenses. Barry, is there any downside to going the IRA to tuition option?

[BPickerCPA]

John,

Only paying the income tax on the withdrawal.

[Guest quinn the car fixer]

related question:

if you roll amounts into a roth(from 401k) and want to take a distribution, does the amount need to be there the 5 yrs to not trigger the penalty ? (excpet for a qualifying dist)

[Lame Duck]

If the 401(k) is rolled to an IRA and then converted to a Roth, it would not be subject to a penalty, even if it is distributed within 5 years of the conversion, if there is an exception to the penalty. In this case, the distribution should be exempt from a penalty since it is a distribution for education expenses.

[Guest quinn the car fixer]

the 5 yrs starts from the date of the rollover? assume no exception allpies

[Guest andyr]

You cannot rollover a 401 k (or any qualified plan) directly to a Roth. You must first rollover to a traditional IRA and then convert to a Roth from there if you wish. This, of course, will trigger ordinary income tax on the amount converted to a Roth. In any event, you cannot escape taxation on any pre-tax money coming out of the 401 K. The only thing you can do is try to avoid the 10% penalty once you roll to an IRA by qualifying under one of the exceptions.