Can I roll over my 401(k) to a Roth IRA without paying taxes?

Alix emailed: If you’re 28 and participate in a designated Roth 401(k) plan and are leaving your employer to start graduate school, can you do a direct rollover to an existing Roth IRA account and treat it as a non-taxable event?

We love that you’ve decided to roll over your Roth 401(k) into a Roth IRA. Many young workers do the opposite when they start a new job or, like you, go back to school. When you leave a job and decide to cash out your 401(k), you not only have to pay federal AND state taxes on that money, but you’ll also get slapped with a 10% early withdrawal penalty.

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What should I pay first: my student loans, my credit debt or myself?

Phil asks: I have $12,000 in credit debt with a 0% introductory APR that ends in March 2015. I have $39,000 in student loan debt with 3% APR. I contribute $250/month to my Roth IRA and another 2% of my income to a 401(k). Every month, I have $750 leftover and I’ve been applying that to my credit card debt to try and wipe out. I’m 35, no kids, and I rent. I don’t have an emergency fund currently. All the money I have saved is in my Roth and 401(k). Should I be attacking my student loans, putting more of my savings into my Roth, or keep knocking down the credit debt?

People often don’t realize that paying off debt can be the best way to save, especially considering that the average credit card APR is 13 to 15%! No matter how much you save in a bank account these days, you’ll never earn as much in interest as what you’d save by paying off that debt. 

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How can I remove old items on my credit report?

Paul emailed: How does a person remove old information or Items that were paid but remain on your credit report? All three agencies have the same outdated information.

Last year the FTC published a study of the credit reporting industry that found that 5% of consumers had errors on one of their three main credit reports that could lead to them paying more for products such as auto loans and insurance. Under the Fair Credit Reporting Act, both the credit reporting agency and the lender or other firm that gives information about you to a credit reporting company are responsible for correcting errors in your report.

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Should I use a HELOC to pay off my $100K student loan?

Margaret emailed: Is it advisable to pay off Parent loan using a home equity line of credit? Our loan amount is $100,000 with 7% to 8% interest.

Swapping a Parent PLUS loan for a home equity line of credit will save you on the interest, because current HELOC rates are much lower than Parent PLUS loan rates. The trade-off is that the HELOC rate is variable, while the Parent loan rate is fixed, says Joe Orsolini, CFP with College Aid Planners. So if you’re willing to deal with those variable rates, a HELOC makes sense, he says.

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How is the interest earned on savings bonds taxed?


Iz emailed: Is the interest from US savings bonds redeemed during the year considered a capital gain, long or short, by the IRS?

Neither. Interest from savings bonds counts as regular income, not capital gains. The interest is considered part of your gross income and taxed at your regular federal tax rate. You can either report the money you earn on savings bonds annually on your tax return, or after you cash in your bonds. You can find more information about reporting interest earned on savings bonds on or the IRS’s website. According to the Treasury, most investors defer reporting the interest, putting it off until they file a federal income tax return for the year in which they redeem it.

Some questions about a $160K inheritance

Robert emailed: We are probating my dad’s will. His estate is worth about $400,000 and will get split 3 ways. That is about $160,000 that I will inherit. I want to put away $10,000 for each of my older kids and $15,000 for the youngest. What is the best option to put some money away for them? How much taxes am I going to have to pay with that big of an inheritance?

Unless you are already maximizing a tax-advantaged retirement account, have an emergency fund in place, and paid off any high-interest debt, we wouldn’t recommend allocating this inheritance to your kids. If you’ve got all that under control, 529 plans are good vehicles that provide tax-free growth for college savings purposes, but they should be considered only for higher education (college) funding. 

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How do we start saving for our soon-to-be-born child’s education and future?

Kyle emailed: My wife and I are expecting our first child in December. We want to put together a financial plan for our child that will help cover education costs, save for his future financial security and provide adequate insurances in the most tax effective way. We are able to contribute ~$25,000 one time distribution and then contribute amounts periodically / monthly from birth. What advice can you provide on best financial set-up for our child, or where can I go for a comprehensive review and assistance?

If, after you’re adequately contributing to some kind of retirement plan, you’ve paid off high-interest rate credit cards, and have around 6 months’ worth of living expenses in case of emergency, you’ve got enough money left over, to fund college a college savings plan, then a 529 plan is a good way to go. (You’ll need to wait until your child is born to open one with him or her as the beneficiary, though, because it requires a Social Security number.)

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What’s the best way to pay off my student loan? And how will it impact my credit score?

Codie emailed: I recently took on a small loan for college — $1,000 for 2 semesters. What is the best way to go about making the payments on it? I know my servicer will set a specific amount up. But I’ve never had anything in my name before and I have no credit score. How can I get the best score? Pay it of as fast as possible, or go by their payment plan? It is a direct subsidized federal loan. Will they report to the major credit bureaus?

Paying off your student loans on time is the best way for you to boost your credit score, especially because you don’t have a credit history. If you pay off your student loan bill in full and on time each month, the three credit bureaus will have record of that – which will be good for your credit score and show potential lenders you’re a creditworthy borrower. 

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What should I do with an extra $40K?

Joe emailed: I am 29, single, male, working in the energy field. I have [no] student debt. I own my home. I have two rental properties: Property 1 (Worth $65K, 0 Debt, Rent = $500), Property 2 (Worth $125K, owe $57K @ 6% for 18 more years, RENT = $1,000 - I’m making $1,500 payments). I bought a new car in 2012 and paid cash. No other debt outside of insurance/property taxes. I currently have $40K in cash and a fully funded employer 401k and my own Roth IRA. My job is tough and I’d like to not have to do it forever. So here’s my question: What do I do now? I’ve been throwing a little money around at individual stocks and have done well, but get nervous with the market. Any suggestions on what I should do to get the most out of my cash on hand?  I’ve been saving to pay off rental 2 and will hopefully be able to after tax time 2015.

You’re obviously averse to having debt, which is understandable and good. So start with paying down that rental property mortgage with the 6% interest rate. It would be one thing if your mortgage debt was accruing at 3% — then it would make more sense to invest your money in the market given a 7% or so return, says Brett Horowitz, CFP and principal at Evensky & Katz / Foldes Financial Wealth Management in Miami. 

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What’s better as a college savings plan: 529 or UGMA?

Samantha emailed: I keep hearing about a 529 plan for college, but I was also told about a uniform gift to minor option. Our son is 2 months old so I want to get started but what are the pros and cons of each option?

We agree, the choices are confusing, but we commend you for starting (really) early. Here are the basic pros and cons to each type of account: the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA), custodial accounts set up by an adult on behalf of a minor; and the 529 plan, a college savings account that’s exempt from federal taxes. This isn’t an exhaustive comparison, so you should investigate further to see which is best for you and your family.

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Can I use 401(k) money to contribute to my grandsons’ 529 plans?

Walter emailed: In 2012 and 2013 when I was age 67 and 68, I withdrew $40,000 each year from my 401(k) and made contributions to my four grandsons’ 529 Education Account. Does this withdrawal count as a Required Minimum Distribution?

First, required minimum distributions from your 401(k) need to be taken after age 70 ½ (so you’ve got a few more years before you have to start withdrawing). But yes, you can use that money to make 529 plan contributions. If you don’t need that 401(k) money, contributing to the college savings account is a good way to make a gift and reduce the size of your estate. As an individual, you can give up to $14,000 per beneficiary each year without incurring a gift tax or needing to report the gift on a tax return; married couples can contribute a total of $28,000 per beneficiary.

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What’s better: 3 credit card account balances with 0% interest or one with 17% interest?

Lorene emailed: I opened several credit card accounts as soon as I was able to after a bankruptcy. I am not using all of them. Some of them have sent me info on 0% balance transfers. I have one account that has about $3500 on it. Is it better for my credit score to have three small balances at 0% interest or for me to have one large account balance at 17%? The 0% cards all have low credit limits so I can’t put it all on one 0% card.

It’s not good for your score to spread your balances across three credit cards. Credit scoring models penalize you for having multiple accounts with balances, so obviously it would be best to move the balances to one card, says John Ulzheimer, credit expert at

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Do I have to cosign a student loan for my daughter?

Joan emailed: Is there a financial institution that will give my 19-year-old daughter a student loan without me cosigning?

It’s good you’re thinking about your options; many parents who end up cosigning on their children’s student loans end up being on the hook for the loan if your child can’t repay. Any student that completes the Free Application for Federal Student Aid, or FAFSA, automatically qualifies for a federal student loan – no credit check, no income verification, and no cosigner required. The issue with the federal program is the lending limits – how much you can borrow per year and overall. The maximum amount depends on your grade level and on whether you’re a dependent student. Dependent undergraduate students, for example, can borrow up to $5,500 for freshman year, $6,500 for sophomore year, and $7,500 for junior and senior years.

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My daughter is a science teacher. Can she get her student loans forgiven?

Nicola emailed: My daughter has large student loans due to a masters degree. She was making 6-figures but was not happy in the coal industry.  She chose to return to school for a year to qualify as a high school science teacher. This is her third year teaching chemistry, physics and general science at a very rural school in southern Ohio. Is there some way to get some of her student loan debt forgiven?

There are a few government programs that offer student loan forgiveness for teachers, and each requires teaching in an elementary or secondary school with low-income students. (Eligible schools are listed here.) Borrowers can receive up to $5,000 in loan forgiveness if they were full-time teachers for five consecutive academic years in an eligible school – so she’s got another couple years to go before she can be eligible. 

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Will I have to take distributions from my Roth 401(k) when I hit 70 ½?

Joe asked: I have a traditional 401(k) and a Roth 401(k) at work. Will I need to take RMD at age 70 1/2 for the Roth 401(k)?

Yes, you do. Unlike Roth IRAs, which have no required minimum distributions during the account owner’s lifetime, Roth 401(k)s are subject to RMDs, starting with the year you reach 70 ½. These distributions aren’t as burdensome tax-wise as the RMDs for traditional 401(k)s because the required distribution wouldn’t be taxable. What you lose is the ability to keep compounding that RMD portion of the account tax-free, says Eleanor Blayney, a CFP and consumer advocate for the CFP Board. There is an exception to the rule, however: If you continue to work past the age of 70 1/2 for the employer that’s sponsoring your plan, you don’t have to start taking RMDs until you actually retire.