rollover 401k to Roth IRA and withdraw from Roth IRA

No, it's considered a conversion, and the holding period for penalty-free withdrawals on a conversion is five years (separate five-year clock for each conversion). In your scenario, you will pay both taxes and penalty if you immediately withdraw the money, so there is no point in first converting to a Roth.

Think about it: your desired scenario is too good to be true, otherwise probably millions of people would do the same thing -- raid their tax-deferred retirement accounts while avoiding their side of the deal, which was to keep the money set aside until retirement.

You can convert (not rollover) up to 100% of your Trad. IRA or 401k, under the new rules in 2010 which eliminate the high-AGI restrictions.

The income tax on the conversion in 2010 by default is spread 50% each over 2011 and 2012, I'm not sure if that is affected by an early withdrawal. I suspect the 10% penalty (plus, for example, 2.5% state penalty in CA) is due in for the current tax year regardless.

-Mark Bole

No taxes, just the 10% penalty on the Roth IRA withdrawal (OP stated that she was under age 59 1/2). Under the ordering rules the taxpayer would be withdrawing an amount that was already taxed at the time of the conversion. Only if she withdrew earnings during the 5 year period, would she pay income tax.

She can convert the whole plan this year under the old rules. She would just have to watch out for the current AGI limits (MAGI of $100,000 or less).

Yes. I should have said, "you'll pay both taxes (on the conversion) and penalty (on the early withdrawal of converted amount)". My point was, there *is* no point here in doing a conversion first, it's needless overhead if the five-year waiting period won't happen.

-Mark Bole

OK, thanks. If I convert $20000 from a traditional 401k to a Roth IRA (paying taxes on the $20000 in the year of conversion), and then take out this $20000 (ie. contributions only, not earnings) from the Roth IRA immediately, do I pay 10% penalty? Do I avoid this 10% penalty if I leave the $20000 in the Roth IRA for 5 years, or if the $20000 goes to pay for college for my child?

(I'm trying to think of some way to get my employer's 401k match and also use the

You will pay the penalty if you take that immediate distribution before turning age 59 1/2 unless you meet any of the exceptions identified in Pub 590. Paying for qualified higher education expenses for your child is one of the exceptions. If you wait for the requisite 5 year conversion period to elapse before taking the distribution, you avoid the 10% penalty on any distribution that represents the amount converted. If at that time, you are still not yet 59 1/2, the distribution is not a qualified distribution. As such, any amount distributed that represents earnings would be subject to tax and penalty unless you are able to meet one of the rules that makes the distribution qualified (e.g., you are disabled).

Before you go any further, I strongly recommend reviewing the rules for your employer 401k plan with your HR department. Are you sure they will let you take anything out at all as long as you are still an employee? Other than possibly a loan, I don't think most employers will let you withdraw 401k money unless you leave the company. It really is intended for retirement, not educational expenses.

As a financial planning item, remember that your child can get loans for higher education; you can't get a loan for retirement. Depleting your retirement funds prematurely could be a big mistake. There is another moderated group, misc.invest.financial-plan, where you could provide more of your overall financial picture and solicit advice on best ways to pay for a child's education.

-Mark Bole