Every day, people miss out on opportunities to keep more of their hard-earned money. If you’re in grad school, you might think your old retirement plan can just sit there, untouched, until you’re done. But what if I told you doing nothing could cost you thousands of dollars?
Last year, we helped 669 grad students save an average of $11,000 using a little-known strategy. Even better? This strategy gave them access to their money sooner. Interested? Keep reading to learn how you can do the same.
Video Version
Meet John: A Grad Student with an Old 401k
John is a grad student with $9,000 sitting in an old 401k. Like most students, John thinks leaving it there is harmless, so he doesn’t touch it. But life is unpredictable, and John needs that money before turning 59 ½. He faces a tough choice: take it out now and pay both income taxes and penalties, or leave it be.
Here’s how it plays out. John, now earning $80,000 a year, withdraws the $9,000. Because he’s under 59 ½, he has to pay a 12% income tax and a 10% early withdrawal penalty. That’s $1,080 in taxes and $900 in penalties, leaving him with just $7,020.
Most grad students think they don’t need to worry about their old retirement accounts. But John’s “do nothing” approach cost him $2,000. Now imagine if John made a smarter move.
A Smarter Strategy: Rolling Over into a Roth IRA
John could have rolled his 401k into a traditional IRA and then converted it into a Roth IRA. Since he wasn’t earning much during grad school, the $9,000 rollover would’ve cost him nothing in taxes. The best part? After just five years, John could withdraw that $9,000 tax-free and penalty-free—whether for student loans, a down payment, or an emergency.
This strategy doesn’t just provide near-term flexibility; it also saves John money in the long run. If John had left the $9,000 in his 401k until retirement, it would have grown to about $98,000. Sounds great, right? But here’s the catch: he would’ve had to pay taxes when withdrawing the money in retirement, costing him around $11,000.
By converting his 401k into a Roth IRA during grad school, John avoids those taxes altogether. That’s $11,000 in retirement savings that he keeps in his pocket!
Does This Work If You’re Working in Grad School?
You might be wondering, what if you’re working part-time or full-time during grad school? Would this strategy still work? The answer is yes!
Even if you’re earning an income, the strategy can still save you money. You may need to spread out the conversion over a couple of years to minimize the tax impact, but it’s worth it. And since most grad students are in a lower tax bracket than they will be after graduation, the tax savings can still be significant.
The Two Major Benefits of This Strategy
- Near-Term Financial Flexibility: By converting your 401k into a Roth IRA, you can access your money penalty-free after five years. Whether it’s to pay off loans, buy a house, or cover an emergency, you have options.
- Long-Term Savings: By converting while your income is low, you avoid paying taxes on your withdrawals in retirement, saving you potentially thousands of dollars.
Why You Should Act Now
Learning this strategy is one thing. Acting on it is another. Last year, we discussed this with 669 grad students, but only 30% took the next step. Don’t let this be a missed opportunity.
If you want to see how this strategy can work for you, schedule a free call with FitBUX. We’ll walk you through the process step by step. Not ready yet? Check out our video on Roth IRA conversions to learn more.
By taking action now, you could save thousands and gain financial flexibility when you need it most. So, what would you do with an extra $11,000?
