Rolling over a 401a into a Roth IRA - Is it worth it to take the penalty?

[cazio]

I'm a new, but enthusiastic Mustachian--very excited to be on the path to FI! but taxes and rollovers still intimidate me. :)

My part time job in college offered payments into a 401a retirement pension plan. Since I will not be working in a field that will use this plan provider, I'm wondering if I should:

-  leave the money in there to accumulate interest (but I will be taxed later)
-  take the 20% penalty and invest the money  in my Roth IRA
- rollover my 401a into my Betterment Roth IRA

I haven't been able to find much of anything about rolling over 401a's into Roth IRAs, and the money we're talking about here is very small in the scheme of things ($1,580ish) account balance, so part of me thinks it may be better just to take the 20% hit, unless rolling it over will cost less in taxes or if there will even be taxes when I roll over. (I haven't been able to find out if it will).


Any advice?

[bacchi]

How much do you make?

Roll it over in a traditional IRA. You can roll it over into a Roth years down the line fo' free, without penalty, when you ER.

[cazio]

Currently I'm making 40k a year, but for the 401a job I made 15k over three and a half years, hence the low amount (I was contributing 10% per paycheck).

What would be the benefit of rolling it over to an IRA vs my Roth?

[cazio]

If you roll it over into a traditional IRA, you don't have to pay any tax on it now.  Put it in a good index fund (we tend to like Vanguard here -- their fees are lower than Betterment and for this small amount of money you don't really need to distribute it across asset classes), and just let it grow.  Eventually you will probably have a year when you aren't having much income (either early FIRE years or maybe a mid-career sabbatical to travel, etc., and you can then take advantage of being in a lower tax bracket to do the conversion to Roth tax free.

This is what I did with my 401a last year.  I'd been getting pretty substantial employer contributions for over 6 years, so it was around 50k. I just rolled it straight into a traditional IRA when I stopped working last year.  Once I hit a low taxable income year (most likely 2018 at the earliest), I'll roll it over to a Roth.

Makes a lot of sense. Right now I'm paying off student loan debt, but once I'm through with that, I'll definitely need to hit the books on rollovers and taxes. I used to think I knew my stuff just knowing the difference between a Roth and Traditional IRA! :P

Thanks for the advice--I'll definitely look into Vanguard for my Traditional IRA.