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What should young professionals who leave the workforce temporarily do with their retirement plans?

Say you've accumulated a modest amount- 2-5 years' worth- in an IRA, 401(k), or other plan (I was on a federal gov't plan). Then you leave for grad school. What's the best plan of action for the accumulated amount? I realize the answer is probably "it depends," but I'd love to know what variables you think matter most.

Jan 06, 2012 by Carrol from Evanston, IL in  |  Flag
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4 votes

In addition to considering a rollover to an IRA, you may want to consider a Roth coversion. This will provide an opportunity for tax-free growth, rather than just deferring the tax liability

Comment   |  Flag   |  Jan 18, 2012 from Arvada, CO

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One other point to add to this conversation would be that some firms, if your balance is $5,000 or less when you leave, the company will automatically distribute the money to you — minus the 20 percent it’s obligated to withhold for the IRS. So you will want to rollover the balance before they can distribute, otherwise you will have to make up the difference of the tax withheld. So if your 401(k) was worth $5,000, you’d get a $4,000 check but would need to add $1,00 to the rollover or face IRS tax penalties. Ask your plan administrator for the firm’s policy on 401(k) balances.

Comment   |  Flag   |  Apr 05, 2012 from Lititz, PA

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Victor's advice is spot on. Moreover, if you delay Roth conversion until a new calendar year when you are in grad school (and presumably making not much earned income), then your tax liability will be negligible. I do not think you need an advisor at this point; open a rollover IRA at Vanguard, Schwab, or the discount broker of your choice, move the funds from your employer-sponsored plan, and convert to a Roth when it makes sense from a tax standpoint. You are going to be investing this account for many years, so I would advise a significant allocation to equities through index funds or ETFs.

Comment   |  Flag   |  Apr 05, 2012 from San Francisco, CA

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Generally I advise clients to rollover their 401(k)'s into and IRA and consolidate their accounts with a trusted advisor who will hopefully do a good job of watching over your money while you are focusing your time and energy on graduate school. You will then have a relationship with an advisor when you graduate that can help you prepare for your new job, helping you budget an increased salary, and work with you on selecting benefits and review your new corportate retirement plan.

Comment   |  Flag   |  Jan 07, 2012 from Boston, MA

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