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February 27, 2014 1:13 PM   Subscribe

What is the best way to move money between retirement accounts while I am currently employed so that I can access it and minimize penalties when I go back to school? (Many, many details inside)

The facts:

-I am married, twenties, USA-based, currently full-time employed, currently in the process of applying for graduate programs for next year.

-As I will be substantially less employed, and my spouse's situation is uncertain for next year, we want to make sure that we have access to as much savings as possible. We each have a traditional IRA, and I have a 401k from a previous job which I have not yet rolled over anywhere.

-My spouse and I owe a fair amount in taxes for 2013 due to a mistake in our tax forms. We can reduce this amount substantially by maxing out traditional IRAs (we did the exact same thing last year). This would drastically reduce our liquid savings.

-My current job just began to offer a 401k (it was never an option previously). I hadn't realized it was possible to roll money from a traditional IRA back into a 401k, but it looks like I will have this option when I enroll.

Here's what I know:
-It is possible to borrow money from my 401k without penalty.
-It is possible to take money out from a traditional IRA without penalty if its for school (or a house, etc.)
-We will have to pay taxes on money we take out from either of the above sources (I am not worried about this as our tax bracket will be very low given our dropping salaries).


The catch:
-I applied to several graduate programs - most of these are in the US, but a few are abroad (Finland, Switzerland, Sweden). It looks like it's only possible to take educational money out from an IRA penalty-free if it's for an American school (or an American program abroad, which these are not).


The question:
You are not our accountants (we have an accountant, but he is not familiar with the educational element here).

What would be the best way to maximize accessible savings while minimizing penalties?

Should we take 11000 out of our savings account to max out our 2013 IRA contribution, thus saving us about 2000 in owed taxes?

Should we empty the contents of my IRA and old 401k into my upcoming 401k so we can borrow the money from ourselves?

After contributing to our 2013 IRA, should we transfer that money to the upcoming 401k to increase this amount even further?

Is there any way to take penalty-free money from an IRA to pay for education abroad?

What are we not considering in this situation?



Thank you for help, and apologies for length and details.
posted by rock'em sock'em puppets to Work & Money (7 answers total)
 
None of your retirement funds are liquid. If you take a loan from your 401(k) you'll be required to pay it all back if you separate from your job. (Ask me how I know).

You can convert your traditional IRAs to Roth, but you'll have to pay the taxes to do it. Also, you may not be eligible to have a Roth as they have income ceilings.

You can always cash out an IRA if you need to, just be aware that you'll pay income tax on the money, and incur a 10% penalty (for early withdrawl.)

If you have to PAY for an advanced degree, it is almost certainly NOT worth the money. What would be the Return on Investment in this instance? How much money would you miss out on by not staying in the workforce for this time? What are other opportunity costs associated with moving out of the country (would your husband be able to work if you did this?)

Not to be a buzzkill, but you should only get a graduate degree with other people's money.
posted by Ruthless Bunny at 1:21 PM on February 27, 2014 [5 favorites]


What are we not considering in this situation?

If you need to do what you want to do, your graduate degree is not worth pursuing.

There are only three acceptable ways to go to graduate school:
  1. You are independently wealthy and can pay for the degree out of pocket without pain. In this case, the opportunity cost of going to graduate school rather than working isn't a problem for you.
  2. You are paid to go to graduate school via a TA or RA position.
  3. You are working while you go to graduate school such that you are able to pay for graduate school with the salary you make.
I am not going to answer your questions about cashing out your retirement accounts, because not only is that a horrible idea in general, it's even worse of an idea to do so to go to graduate school.
posted by saeculorum at 1:26 PM on February 27, 2014 [3 favorites]


It is possible to borrow money from my 401k without penalty

That will only be true if you are still working there.
posted by soelo at 1:29 PM on February 27, 2014 [1 favorite]


I'm going to answer your "What are we not considering in this situation?" question. You are not considering the fact that neither you nor anyone else should ever go to graduate school for a non-professional degree, and especially not you have to pay for it. As someone on my third graduate degree (this one terminal, maybe in more ways than one!), I feel exceptionally well-positioned to urge you not to pay for a non-professional graduate degree (and possibly not even then). Unless you're getting an MD (or maybe an MBA or JD from a top school), it is extremely unlikely that you will ever recoup your financial investment. Not only that, but you won't ever recoup the time or emotional investment either: it is virtually certain that you will never get a job in whatever it is that you are about to do graduate work in (ask me how I know...). I know from personal experience that even the most stunningly accomplished people from the most prestigious universities on the planet can't find academic work (and I know several examples personally in the years above me) - let alone anyone else. I regret the day I ever began graduate school, and all of my degrees were *fully-funded*: I can't imagine how much more robbed I'd feel if I had paid out of pocket for them. I know this isn't what you want to hear, but unless you have genuinely exceptional circumstances (and virtually no one does), I would urge you in the most animated language to reconsider. Feel free to MeMail me if you need more dissuasion.
posted by ClaireBear at 1:40 PM on February 27, 2014 [1 favorite]


Wow - ok. Thank you all for advice, both useful and less useful but concerned.

Thank you Ruthless Bunny and soelo-
I hadn't known about not being able to borrow from the 401k unless I'm currently employed with the backing organization - thank you very much for that - I will not be rolling money over into the new 401k if that's the case, and will instead roll my previous 401k into my IRA.

I think this pretty much renders my other questions moot, as if need be we can always take the money from the IRAs - ideally we wouldn't have the penalty due to educational expenses, but even if we do the penalty will be less than the money we're saving through tax deductions this fiscal year, even factoring in the taxes when we do take out the money. I'll keep it open a little longer to see what other advice comes through.


Just to confirm for the people responding as to whether or not I should go to graduate school: this is not a question of whether or not to go to graduate school. I am only considering schools that are free and/or heavily stipended, and the money I'm talking about here is essentially emergency money, so that we need not take out loans (we're still working out whether it makes more sense to take out loans or to take money from these retirement accounts, and I just wanted to be aware of my options). I'm not concerned about finding a job after. I have pretty unique work experience for the kind of graduate school I'm considering, and a thorough understanding of how I will bridge the two after I've finished the program so that we will not be in debt and starving. There are many, many things we have considered in this decision - the space, time, resources, and geographies that these universities afford, for instance. Graduate school being a magical stepping stone to all of the easy jobs and all of the wealths was never one of these considerations.
posted by rock'em sock'em puppets at 2:33 PM on February 27, 2014


The following answer is not giving you permission to go to graduate school. I maintain that if you are at all questioning your finances to fund going to graduate school, you should not go to graduate school. I am only providing this information so you don't make a bigger mistake.

In general, your approach seems quite bad for you, as are suggesting forfeiting future retirement account earnings in order to avoid having a loan. The interest you pay on a loan is of bounded timeframe - you can pay it off and stop paying that interest. However, the future retirement account earnings you make are of unbounded timeframe - they will occur until you need the retirement funds for retirement. Since effectively all people fund their retirement mostly from earnings rather than contributions, it will generally make sense to take out a loan - especially a government-subsidized one for education - rather than withdraw from your retirement accounts. They are called retirement accounts for a reason; they are not savings accounts.

Beyond being ineligible if you go to school overseas, if your school is free/highly subsidized, then you might not be able to make as much of a qualified distribution from your IRA (a withdrawal that will be taxed, but will not incur a 10% penalty) as you think you can. In particular, you can only make a qualified withdrawal from your IRA for the amount of your educational expenses that are not covered by your school (see Publication 970). Depending on how your school structures graduate financial assistance, the amount you can make as a qualified withdrawal may decrease (if the support is tax-free) or not decrease (if the support is taxable wages made for an assistantship position). However, you can work around this by converting your IRA, or part of your IRA, into a Roth IRA and paying the associated tax penalty. At that point, you can make a withdrawal of the contributions you've made to your IRA at any time without a 10% penalty.

Finally, you might simply consider going without access to your savings. I've always found the notion of having readily accessible savings to be a bit odd because you have credit cards for that. So long as you can pay off your credit cards relatively quickly (most have a month grace period), you will not incur a credit card interest penalty. If your emergency expense is greater than your credit limit, it is almost definitely the case that you don't need to pay it off immediately. In either case, you might question whether you really need to have as much liquid savings as you think you do. If you are living in Europe, you are even better off because medical expenses will not result in you needing immediate funds.
posted by saeculorum at 3:06 PM on February 27, 2014 [3 favorites]


Don't really know the answer to your questions about penalties when taking out of your current accounts (other than the very large "penalty" you pay when taking money out of your retirement account which is losing the ability to have it keep growing for however many years you'll be in school).

For your new job, though, I suggest you do some googling about Roth IRAs. My understanding is you can always take your principal out, tax- and penalty-free, because you paid tax on it going in. (But I could be mistaken so please please verify before trusting this.) So that would be a good source for savings this year that you want to put into a retirement account on the theory you might not actually need them for graduate school. (Though if you're sure you're going to school, opening a savings account seems like the way to go.)

***

Also, totally separate advice, but look into converting your 401k/IRA to a roth IRA while in school. You'll pay tax on the conversion, but you will be in a really low tax bracket...
posted by _Silky_ at 9:06 PM on February 27, 2014 [1 favorite]


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