MTM Mailbag: ⚡️Can I Roll My 401K Into A College Fund?

Every week during the More Than Money show on AM 750 WSB we open up the week's mailbag to answer your questions in the "Lightning Round." Today we’re discussing how to utilize your 401K when saving for college and the benefits of a 457 retirement plan.

Most of these questions come from the site, but we aren't afraid to throw in texts, DM's and great things we hear from in-person meetings. We answer each specific case situations in more detail through email, but I always like to share some general feedback.

Let’s get into it!


QUESTION ONE

My daughter is 5 years old and I want to start a college fund for her. I heard somewhere that if you have a 401K account you can roll it over into a college fund. Is this correct?

— Jill

If you are currently working and have a 401K through your job, you can’t move that out if you’re under 59 1/2. It’s going to have to stay as a 401K where you’re working. If you’ve already left the company, you can roll the 401K into an IRA. You can use this IRA for college expenses, but you can’t roll it into a 529 (a college saving accounts). You can use your IRA for college expenses and they will waive the penalty.

With an IRA you’re still going to owe income tax, if you pull money out, but there won’t be a penalty. Normally there is a 10% penalty if you pull money out of an IRA before you’re 59 ½, but they waive that penalty if you’re using it for college.

I suggest you open a Roth IRA because they’re flexible. You can save money that could be used for you daughter’s college, but if she gets a scholarship, you can use the money for retirement. All along the way you have liquidity because the dollars you put into it are flexible.


QUESTION TWO

I’m a firefighter, and im considering retiring in the near future, im in my 50s and I have a 457 plan. My current financial advisor said I can roll that into an IRA when I leave. Is that something you would recommend?

— Pete

I would be very cautious of rolling it into an IRA. There are times to do that, but your 457 carries something very unique that no other retirement plan can offer. It doesn’t have a 10% penalty if you take it out when you’re under 59 ½. I don’t know the details of your situation. If you have a lot of other liquid money that you can use towards retirement, then maybe you don’t need to pull from the 457. Most people that’s not the case.

If you roll the 457 into an IRA, it takes on the restrictions of the IRA which includes the 10% penalty if you take it out before you’re 59 1/2. It would be very dangerous for you to move it into an IRA unless you’re sure you don’t need that money. The 457 is more flexible which is why I would recommend keeping the money in your 457.


THAT'S ALL FOR THIS WEEK!

As always, I don’t know the full situation with these questions. If you want to dive deeper into any of these questions please don’t hesitate to set up a free consultation through the link below. I would love to help you figure out the most efficient way to save and utilize your money.

Have a question? Let us help.