One of the most exciting things about what I do is not only show families how to save thousands of dollars on the cost of college, but to show them financial and/or tax strategies that they'll greatly benefit from.
For example, I've had numerous families that have come into my office showing me an old 401k sitting out there with their former employer. One of the first things I ask is, "How well is the old 401k doing, and do you think you may have to potentially tap into some of those funds for college expenses?" Almost all families have the same response, "Well, we don't really want to touch our retirement dollars unless we have to." I couldn't agree with them more. The sad part, however, is that many families have had to tap into their old 401k to help their kids with unforeseen college expenses.
If spending money out of your old 401k is something that could potentially happen to you, then you may want to seriously consider rolling that old 401k into an IRA position. Doing it is easy! And, it is NOT a taxable event. Plus, turning it into an IRA can provide you with more college-friendly options that what an old 401k can afford. The savings could be significant!
Here's why you may want to seriously consider turning your old 401k into an IRA:
1) First, the Internal Revenue Service is nice enough to allow greater flexibility with an IRA than they do with 401k's! Believe it or not, the IRS will allow you to pay for you or your children's qualified college expenses with IRA money without having to pay a 10% pre-59 1/2 distribution penalty. That's huge!!! With a 401k, you'll have to either take a loan out (up to 50%) and pay the money back with interest within 5 years. Or, you can take the money out to pay for college expenses and be charged the 10% IRS penalty tax! Remember though, with either plan you'll have to pay taxes on the money received. But, with an IRA there is NO 10% penalty tax.
2) The IRA also has more flexibility in withdrawing money for other needs as well! For example, if you lose your job (God forbid!) and you haven't turned 59 1/2 yet, you can still avoid the 10% penalty tax by using an IRS approved strategy. Your old 401k won't allow you to do that.
3) IRA's provide many more investment choices and opportunities than do 401k's! Thus, your earnings potential could be much greater.
4) An IRA also can be a much better estate-planning tool! One good example is that, if you die, your beneficiaries will have more tax-favored options in receiving those hard-earned dollars than they would with your old 401k.
5) Your old 401k probably has management fees and various charges. Many IRA's don't have either - thus saving you a lot of money!
6) Most 401k's have greater risk issues than do some IRA's since they are mostly tied to stock market values. Some IRA's will offer you stock market gains without any downside risk. In other words, there are some IRA's out there that will contractually grow your money along with the market but will lock your gains in each year. If the market goes down, you don't lose anything. Then, when the market goes up, you receive some of the gains.
But, before you throw your old 401k money into any IRA, please give our office a call. We'll provide you with some great information and options that can provide the most college-favored programs available. It's free, and there's no obligation!
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