Rollover 401k to a Traditional IRA. Plan to withdraw in Spring 2009 for home purchase or education costs?


By admin ~ July 13th, 2009. Filed under: General.

Rollover 401k to a Traditional IRA. Plan to withdraw in Spring 2009 for home purchase or education costs?

We may be buying a home in the spring. *maybe*. I have a measly $3,400 in a 401k with a company I no longer work for. I am ineligible for the current company's 401k for a while. I am attending college in 2009 and may want to buy a home with my sig. other also.
I want to rollover my 401k to a Trad. IRA but may withdraw within a few months for a home, or education expenses. I know I will pay taxes, though these are both approved withdrawals and no 10% penalty applies.
Can you suggest a low-cost IRA for me. And, can I withdraw within a few months of opening the account for these expenses? I know with a Roth IRA there is a 5year waiting time though not with Trad. IRA's- as far as I could find.
Is is silly to withdraw these funds for this purpose? Being so minimal, I didn't think it was a bad idea and could really help with the closing costs/down payment or education costs for the year.
Thanks for any help!

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2 Responses to Rollover 401k to a Traditional IRA. Plan to withdraw in Spring 2009 for home purchase or education costs?

  1. admin
    July 13th, 2009 at 4:30 pm
    A "measly" $3,400 left in an aggressive growth fund for the next 50 years will turn into between $160,000 and $900.000

    You won't pay any taxes rolling a 401(k) into a Regular IRA, though you will if you chose a Roth IRA (probably a better choice for a person in your position).

  2. admin
    July 13th, 2009 at 4:30 pm
    If you're not planning to leave the money in the IRA for more than a few months, then do a direct rollover from your 401k to a credit union or bank IRA savings account. If you do a direct rollover, you can avoid having withholding taken, which is really important. Otherwise you have to come up with the cash yourself to ensure that the amount distributed equals the amount rolled over into a traditional IRA or be subject to taxes and penalties on the withheld amount. Also, fewer credit unions charge fees for setting up IRAs or closing out IRAs. Some banks charge as much as $100 to terminate your IRA.

    There's no waiting period to withdraw from your traditional IRA. As you have correctly stated, the funds will be subject to regular income tax but not a penalty if these are used for a first-time home purchase or qualified higher education expenses.

    As far as it being a bad idea - here is my opinion. That "measly" $4,300 could be worth over $350,000 by the time you retire if you carefully invested it in a broad market mutual index fund with low expenses. At your age, the future value of a relatively small amount of money will be significant.

    Also consider whether you have enough discretionary savings to manage all the extra expenses of home ownership - things such as maintenance, repair, property taxes, utilities, etc. And, you might also consider waiting until you're married. Sharing a home, personally speaking as well as financially speaking, with a significant other as opposed to a spouse can be very complicated. You won't have as many legal protections of your substantial financial investment/obligation as you would were you a married couple.

    These are all very big decisions, so take your time and do your research.

    Good luck and best wishes.

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