Ask Terry Questions 529 plan vs 40l(k)

529 plan vs 40l(k)

By Terry Savage on March 07, 2014 | College Savings / Student Loans

I have an old 401(k) with Fidelity. My wife says you’ve recommended Fidelity 529 plans. Can that be rolled over into their 529? I understand I can roll over into my existing ROTH IRA but is there anything I can do to move this money into a college plan?

Terry Says:  No, you can’t move money from a “qualified” (that is pre-tax retirement plan) into a 529 plan.  Actually there would be no point in it.   The money in your 40l(k) plan is growing tax-DEFERRED, but will be taxed as ordinary income when you take it out at retirement.  And if you take it out sooner than that, you lose that tax-deferred growth for your retirement.  And if you take it out before age 59-1/2, you also have to pay a 10% early withdrawal penalty!

If you’re saving for college for a child (or grandchild), what you should do is invest money that you’ve already paid taxes on, and put it in a 529 where it can grow tax-free if used for college expenses for any child in the family.  Fidelity is a great place to start a 529 plan, although if you invest in a plan managed for your state you might get a small break on state taxes for the money you invest.

But these two things are completely separate.  You need your own retirement plan.  Even if you manage to give your child a great college education, and he/she graduates without student loans, it is still doubtful that the child will help you through your retirement years!

PS  You can NOT roll over your 40l(k) plan into a Roth IRA.  But if you leave your employer you can roll it over into a traditional IRA rollover.  Fidelity can help you there, too, by handling the transfer of money from your 40l(k) directly into the IRA Rollover account so you aren’t subject to taxes and penalties.

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