I’m quitting my job and going back to school – should I convert my 401k and 401k Roth to just a Roth IRA?

A Redditor is about to quit their job and return to school for a year and posted about it in the Chubby FIRE Reddit group. While it may initially seem odd that this type of post made it into the subreddit, the Redditor is planning to move funds from a traditional 401(k) and a Roth 401(k) into a Roth IRA. It’s a pretty solid move, and while this one seems more straightforward, it’s good to speak with a financial advisor if you can.

Traditional IRA vs. Roth IRA

Traditional IRAs and Roth IRAs offer the same investment opportunities. The key difference is taxation. Contributions for traditional IRAs are tax-deferred, while you pay taxes right away on Roth IRA contributions. However, you don’t pay anytaxes on Roth IRA withdrawals or capital gains. Meanwhile, you have to pay taxes on those same withdrawals if you use a traditional IRA. 

Traditional IRAs are at their best when you are making a high income and want to reduce your current tax burden. The hope is that you can eventually withdraw funds from a traditional IRA when you are in a lower tax bracket or can report a significant paper loss with an asset like real estate.

Contributing to a Roth IRA makes more sense when you aren’t making as much money. It makes sense for the Redditor to roll their funds from a traditional 401(k) plan into a traditional IRA. It’s also a good idea for the person to roll over the Roth 401(k) into a Roth IRA. That way, the Redditor has plenty of flexibility with what they can buy while enjoying tax-free withdrawals when they get older. You will also get hit with more fees if you keep a 401(k) plan open that you created with a former employer.

Letting Taxable Income Guide the Decision

There are two key details that we didn’t get from this post. We do not know how much the Redditor earned before leaving the job and how much they expect to earn next year. The less money the Redditor earned this year, the more sense it makes to move all of the funds into a Roth IRA. Take the small tax hit now and let the funds continue to grow tax-free.

It’s a little different if the Redditor doesn’t expect to earn any money next year. In that case, the Redditor can move some funds now and then move the remaining funds into a Roth IRA in January of the following year. Moving the funds in January will minimize 401(k) account management fees. 

The comments seemed to agree that moving funds from those accounts into a Roth IRA is the right move. The Redditor has roughly $45k in each account, making it approximately $90k in total. Only the $45k from the traditional 401(k) is taxed, and those funds will have a federal tax rate of 12% or lower, especially since the Redditor can use the standard tax deduction, which is $15,000 in 2025.

Move Some Funds into a Traditional IRA

The Redditor does not have to worry about any tax implications if they move funds from a Roth 401(k) to a Roth IRA. This transfer does not boost their taxable income. However, if the Redditor made enough money to push them into a higher tax bracket with the rollover, they can split the rollover into two accounts. 

Some of the funds from the $45k traditional 401(k) can go into a Roth IRA, while the other funds go into a traditional IRA. Splitting up the accounts this way reduces the tax burden, but it’s probably better to move all of the funds into a Roth IRA while the Redditor’s taxable income is still low.

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