Should I cash out my 401K, since I'm going to law school? Forum

[Leeroy Jenkins]

What is your 401k growing at?

My retirement accounts are growing at 20-30% interest right now. Taking out loans is a cheaper option.

[Dignan]

What is your 401k growing at?

My retirement accounts are growing at 20-30% interest right now. Taking out loans is a cheaper option.

It's 20-30% right now. But between 2005 and 2008, you would have likely seen a negative rate of return. You just don't know what the rate of return will be between 2010 and 2013. It might be solid (though very unlikely to be 20%+ for three years); it might be stagnant; it might be negative. It's a risk to assume that your rate of return will be greater than the interest rate of your loans. It might be a risk worth taking, but it's a substantial risk.

[vanwinkle]

What is your 401k growing at?

My retirement accounts are growing at 20-30% interest right now. Taking out loans is a cheaper option.

It's 20-30% right now. But between 2005 and 2008, you would have likely seen a negative rate of return. You just don't know what the rate of return will be between 2010 and 2013. It might be solid (though very unlikely to be 20%+ for three years); it might be stagnant; it might be negative. It's a risk to assume that your rate of return will be greater than the interest rate of your loans. It might be a risk worth taking, but it's a substantial risk.

+1

People are bidding up the stock market right now in anticipation of the coming recovery. Most of the gains are already priced in, the upward movement is going to slow down quite a bit here soon.

[ozarkhack]

But between 2005 and 2008, you would have likely seen a negative rate of return.

Fuckin'-A right you would have. Shit-your-britches negative rate of return. That nice 10-15% per I saw from 2004-2006 was like a fart in the wind by March 2008.

That said, it's been rebounding, slowly. ... All this info is helping answer questions I've been asking the last couple of days. Didn't even realize I could maybe avoid early-withdrawal penalties. This could definitely change some things (not least my plans for a comfortable retirement).

[Leeroy Jenkins]

It's 20-30% right now. But between 2005 and 2008, you would have likely seen a negative rate of return. You just don't know what the rate of return will be between 2010 and 2013. It might be solid (though very unlikely to be 20%+ for three years); it might be stagnant; it might be negative. It's a risk to assume that your rate of return will be greater than the interest rate of your loans. It might be a risk worth taking, but it's a substantial risk.

So when it's no longer in your favor not to cash out, cash out. Easy solution.

[the lantern]

Personally I have never had problems in the market, which is why I'm thinking about just keeping it in the IRA. I made approx 35% gain between 2002-2006 and I took my money out a few months before Lehman (I actually listened to the financial analysts who had been forecasting the coming shit storm in housing). Since I put my money back in, I've doubled it. I'm not bragging, just saying that if I can continue to make more than 8-9% (or whatever student loans are at), it might be a better idea to just keep the money in the retirement account rather than take it out. 10k now is just 10k, but that 10k will be MUCH more when you are 60 and can withdraw (assuming I don't absolutely NEED to take the money out for school).

[ughOSU]

It's 20-30% right now. But between 2005 and 2008, you would have likely seen a negative rate of return. You just don't know what the rate of return will be between 2010 and 2013. It might be solid (though very unlikely to be 20%+ for three years); it might be stagnant; it might be negative. It's a risk to assume that your rate of return will be greater than the interest rate of your loans. It might be a risk worth taking, but it's a substantial risk.

So when it's no longer in your favor not to cash out, cash out. Easy solution.

I love how Americans never learn anything... 20% returns on your 401k is not sustainable!!! I really hope nobody is taking your financial "advice" seriously.

TCR is to roll the 401k into an IRA and use the IRA to pay for part of your first semester 2L year (during the year you won't be making money anyway). You won't have to pay the 10% penalty tax. You will have to treat it as income, but it won't be much in taxes anyway bc your earnings that year will be meager.

[schmohawk]

Helpful thread, as I too have been toying with the idea of rolling my 401k into a trad IRA. Those of you recommeding the Roth, I thought you had to show earned income to make your contributions tax-free, thus making it impossible unless you're going to law school part time. Or am I just way off?

[ughOSU]

Helpful thread, as I too have been toying with the idea of rolling my 401k into a trad IRA. Those of you recommeding the Roth, I thought you had to show earned income to make your contributions tax-free, thus making it impossible unless you're going to law school part time. Or am I just way off?

When I looked into it I saw no easy way to roll it over into a Roth without treating the balance of the 401k as income in the year you are working. I feel like people who don't know a lot about finance throw the term "Roth" around because they hear it a lot. The basic difference is that for Roths, you need to treat your contribution as income when you put it in to the IRA. With the traditional IRA, you treat it as income when you take it out. Note: I am not a financial adviser and do not know if any of the stuff I posted is correct.

[jjleague]

Talk to a bank or Fidelty they will help you set up the Rollover IRA. The money is not income unless you take a distribution. When I have rollovers you may get a check in the mail. Send it off to the rollover company and they will take care of it. There are spots on the 1040 for this kind of transaction and it is not considered income IF you don't take a distribution.

You sign a few forms and give them approval and they will do most of the work for you. If you are worried about the loss in money due to the economy you could find very safe accounts like Money Markets or something tied to the US dollar. You won't make anything but you may not lose much either. Unless we hit a big patch of inflation you should be ok. If you don't want to mess with mutual funds check out the funds that do all the leg work for you and all you do is set the retirement date. I have most of mine in a 2040 account. Nothing is guaranteed but it does reduce the chances of complete loss.

Remember it is your money. If you let someone else manage it you better find a company who really knows what they are doing and you can trust. This is something that you need to take to a professional about and not so much for forums as you don't know who you can really trust here.

[ughOSU]

Talk to a bank or Fidelty they will help you set up the Rollover IRA. The money is not income unless you take a distribution. When I have rollovers you may get a check in the mail. Send it off to the rollover company and they will take care of it. There are spots on the 1040 for this kind of transaction and it is not considered income IF you don't take a distribution.

If you do it the way where you get the check first, you have like 30 or 60 or 90 days or some other finite amount of time to complete the rollover or else it is considered a distribution and you must pay the 10% early withdrawal penalty. I kinda run my company's 401k administration so I know a little bit, but you can set it up with Fidelity/John Hancock/Schwab/etc. so your funds go straight from your 401k to your IRA at the time of your last paycheck. This is probably the easiest way to do it.

e: this is true:

This is something that you need to take to a professional about and not so much for forums as you don't know who you can really trust here.

[the lantern]

You can also use a service like etrade to set up a self-directed IRA. I'm not sure on the rules and whatnot, but I'm going to be doing some investigating over the next couple months, so I'll be sure to come back with anything I learn.

[Connelly]

Cash out and buy lottery tickets with it.

[keg411]

hell, if you get it out, put it in a cd. not very sexy, but its the one of the few that are sure things.

The rates on CD's are pretty terrible right now (my first year when I opened one I got over a 5% interest rate; now it's closer to around 1%), although maybe it will be better next year and has improved since I renewed mine in September. However, it's a nice option if you want to lock down your money without worrying about what the rest of the market does.

[SamSeaborn2016]

I'm generally an advocate of "don't mess with it unless you absolutely need it." That said, it is certainly possible to roll it over to a traditonal IRA account (millions of options to choose from) and not have any penalties or pay taxes (since it is going from one qualified plan to another). Once it is in an IRA, you can pull from it as necessary, not having to worry about penalties if you are using the funds for qualified education expenses. Taxes would probably not be much of an issue either if you are a full time student and not earning enough income to owe any.

Converting/Recharacterizing your traditional IRA to a Roth IRA becomes more complicated. You will typically have to pay some taxes. Although, I believe starting next year the IRS will allow IRA conversion taxes to be paid over a 3 year period rather than all at once. Don't quote me on that one, I don't remember the exact details.

edit: Just thought of this and I don't think anyone else mentioned it. Is everything in the 401k you mentioned yours to mess with? Most companies have vesting restrictions for their contibutions.

[ruleser]

It just depends if you need it - I've become pretty anti-401K - amazing they've come up with a way to fine you for using your own money...

But I wouldn't bother with it unless it were a need, or unless you can get the higher end/no penalty thing that someone mentioned...

[schmohawk]

.

[SamSeaborn2016]

I'm generally an advocate of "don't mess with it unless you absolutely need it." That said, it is certainly possible to roll it over to a traditonal IRA account (millions of options to choose from) and not have any penalties or pay taxes (since it is going from one qualified plan to another). Once it is in an IRA, you can pull from it as necessary, not having to worry about penalties if you are using the funds for qualified education expenses. Taxes would probably not be much of an issue either if you are a full time student and not earning enough income to owe any.

Converting/Recharacterizing your traditional IRA to a Roth IRA becomes more complicated. You will typically have to pay some taxes. Although, I believe starting next year the IRS will allow IRA conversion taxes to be paid over a 3 year period rather than all at once. Don't quote me on that one, I don't remember the exact details.

edit: Just thought of this and I don't think anyone else mentioned it. Is everything in the 401k you mentioned yours to mess with? Most companies have vesting restrictions for their contibutions.

I talked to someone in my HR department about this and they seem to think it's a 5-year vesting period for our bank. I'm not convinced this is entirely true though, seems a bit long as my wife has been fully vested since day one with her company (she's a pharmacist at CVS). If it is true, I'm losing a couple g's.

5 years sound about right for most companies. You only have to worry about vesting when it comes to the money the company contributed. Any funds you contributed are yours to fiddle with if need be. Getting closer to quitting your job you will want to double check with your HR folks/plan administrator anyhow to find out if you HAVE to take the funds out once your employment ends. Some companies require, others don't.