[taimaisho7]

I am debating on liquidating my 401k and I know you hear a lot of these questions but I feel my question is a bit different.

I am in my mid twenties residing in the state of Texas where there are no state income taxes. I am currently in the 25% federal margin tax bracket but probably be bumped up to 28% if I liquidated my $40k 401k.

I am wanting to do this something this year while residing in the state of Texas to where my total tax+penalty might be 38% (28%+10%)

My question is, if I liquidate my 401k in Texas, then move to another state with state income tax within the same year and be employed, how does the taxation work on my 401k come the following year during tax season?

Will the IRS know that I liquidated my 401k in Texas and not come after more because part of the year I will be in another state? What type of documentation might I proactively prepare beforehand?

Additional information: I am needing this cash to start a new venture. I feel that being young, this might be the one of the better times to venture out and try something that can dramatically change my earning potential.

Lastly, if I have thoughts of going back to graduate school for an MBA, would it be wise to leave the 401k and use it all to pay for my MBA? Which would also be a nice alternative since its helping me increase my potential earning potential.


Truly thank you in advance, I have been dwelling on these questions for awhile and glad I found this site!

[AtlantaTaxExpert]

Firsdt and foremost, you should NOT liquidate the 401K. It is better to roll the 401K money over into a rollover IRA where it will continue to grow until you retire.

If you need money for a new venture, get a business loan or use venture capialists.

If you need money to get a MBA, use student loans which are generally deductible.

Your 401K is designed to fund your retirement. Use it for that purpose.

That said, if you DO liquidate and receive the money while still living in Texas, the money is considered to be Texas income and this NOT subject to state income tax in the new state. This is proven by the address on the check being a Texas address.

[taimaisho7]

Thank you for straightening me out.

I do agree with you that I should seek a business loan or use VC's, but both are highly unlikely to occur since the business I am trying to start is unique and is highly independent performance based. Also, VC's tend to ask for most of the profit margin.

Regardless my venture doesn't fit into a business loan qualifying criteria.

For an MBA it makes sense; however, I believe the ROI from the MBA would negate most of the benefit from a 401k, an IRA might have better returns. However, its just the 10% penalty that would be avoided once retirement eligible.

I guess I am thinking really hard against the fact that I feel I could have better utility of the small sum of cash now compared to decades from now.

Any further input would be greatly appreciated. I just didn't have anyone to bounce these options off and your inputs on this website are greatly helpful.

Thank you,

[ebaines]

If you are thinking of using the money from your 401(k) to fund an MBA, it would make sense to roll your 401(k) account to a rollover IRA after you leave your current employer, then take withdrawals from the IRA to pay for your MBA expenses. Reason is that withdrawals form an IRA that are used for higher education expenses are exempt from the 10% early withdrawal penalty, whereas withdrawals from a 401(k) are not. Of course you still have to pay federal income tax on the withdrawal (and state/local taxes, if applicable where you live).