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I am a grad student in the US. As an undergrad I managed to save about $20,000, I have no debt, and I have a 401(k) with about $12,000 to which I am no longer making contributions. I am breaking even between income and living expenses and will continue at this pace for at least 3 more years, so while I hate to see this money sit in my savings account I also need to be sure it is safe and readily available in case of an emergency.

According to the answers to the closely related questions here and here a Roth IRA is a safe bet. I am considering rolling my 401(k) into a Roth IRA already since the taxes I will owe right now should be low. If I do this, I can't imagine I would be allowed to contribute my savings as well and also be able to withdraw it if necessary.

Can I rollover my 401(k) and contribute the maximum yearly amount out of my savings, or will I need a second Roth IRA to be able to withdraw whatever I invest? Or should I just invest in a mutual fund or put it in a money-market account?

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    As a graduate student, you might not have enough earned income to be able to contribute to an IRA, whether Traditional or Roth. IRA contributions are limited to taxable compensation (wages, salaries, bonuses, commissions for sales, etc) or $5500, whichever is less. Note that fellowships (even though the stipend is taxable) do not count as compensation because you don't have to do anything to earn the money.
    – Dilip Sarwate
    Apr 24, 2018 at 14:08
  • @DilipSarwate thanks for pointing that out, I wasn't aware. It's another factor I will have to consider.
    – wyoumans
    Apr 24, 2018 at 14:39

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I assume you want to put your "safety net" money into a Roth knowing you can take out your contributions should you need to. But you also want to roll your 401(k) into a Roth. This should not affect your contribution limit or your ability to withdraw the money you contributed directly to your Roth.

According to this article, the IRS views withdrawals from a Roth IRA in the following order: your contributions, money converted from traditional IRAs and finally, investment earnings.

They don't mention 401(k) but there are plenty of articles that do so I would assume the same rules apply.

One thing that wasn't clear to me is where the taxes on your 401(k) will need to come from. But it looks like you won't be able to use money from the 401(k) to pay the taxes so be sure you have enough to cover that.

To avoid any mishaps I suggest using the bank\brokerage to do the roll over directly. Don't do the transfer yourself by cashing out your 401(k) then trying to open the Roth with the check.

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  • Thanks, that article answered my question about mixing my contributions/investment earnings in one Roth IRA and how withdrawls would work. As to the taxes, I was under the assumption I would be paying out of my savings. Im still trying to determine how much that's going to cost.
    – wyoumans
    Apr 24, 2018 at 8:09
  • But Ill be doing the transfer through a brokerage. Thanks for the information. I will wait a bit before accepting.
    – wyoumans
    Apr 24, 2018 at 8:10

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