Hi PF, I see a lot of people recommending the boilerplate advice of maximizing your Roth IRA contributions before your 401k. I'd like to add my two cents, which is if you're young and considering going back to school full-time, prioritizing your 401k contributions over Roth may make sense because of Roth conversions.
You can read a lot of literature about 401k and Traditional IRA to Roth IRA conversions on the internet, so I won't explain how it works. However, it may be better than directly maxing a Roth for people going back to school because your income is likely to be very low during the year(s) you're in school. Rollover conversions are taxed as normal income in the year you perform them, meaning effective tax rates apply, as opposed to Roth contributions, which are taxed at the marginal rate. If you perform the rollover while you're in school, you'll owe a one-time tax bill that is less than the taxes you would've paid had you been contributing to a Roth (assuming the total rollover plus whatever other income you have in school is equal to or less than one year's salary), and you stand to save a ton on taxes in the long-run.
Submitted July 08, 2018 at 07:37PM by WantsToGoToCollege https://ift.tt/2KIhIZ5
