pension plan?
I need some advice and don’t have anyone to ask. husbands job got rid of there pension plan. So we were told that we had 3 options to do with the money, which are:
1. transfer it into my 401 k
2. transfer it into an IRA
3. take the lump some.
Because he is married, both he and I have to agree on what to do with the money or they will just give us the accured monthly benefit.
Husbands wants to put it into his IRA and invest it. I want to take the lump sum knowing there is a 20% penelty and pay off all out credit cards and medical bills. Even though we would have to pay the penelty there is enough left to pay off all the debt or most of it anyways.
What would you do and why?
sorry about the spelling mistakes I was so upset that I just submitted it before I spell checked…
Oh and if it matters we are 32.
1. Rollover the entire amount to a “Rollover IRA.”
2. Never take the distribution or you will have 10% IRS early withdraw penalty on the entire amount, plus the entire sum will be deemed as taxable income on your state and federal tax return.
3. Retirement accounts should never be used to pay off debt. They are not debt accounts, they are retirement accounts.
You have 60 days to complete the transfer if you get a check in your name with the retirement funds. Best to do a direct transfer from the place where you want the IRA account to be held. You can always rollover the IRA to another institution if you want later.
RE: Investing. Be careful right now. Don’t put all the money in the market at once. Use Dollar Cost Averaging of by taking 1/12th of the funds each month on the same day (say 25th) over the next year.
Consider indexing your retirement for ease of use and get market returns and dividends. Example: S&P 500 Index.
Can be bought as a fund or stock (SPY). See my prev posts on investing.
Good Luck!
Is the amount for options 1, 2, and 3 the same? If so, I think you should transfer it into an IRA (an IRA gives you a broader choice of investment options than a 401(k)). If you take the lump sum, you’d have to pay the penalty and taxes on it now. If you roll it into an IRA, it would be tax free and grow tax free until you retire. At an average 8% growth rate, it would grow to over three times its current value by the time you’re 65.
I think you should pay off your debt out of your current earnings — even if it will take awhile to do so. Give yourself the gift of a head start on your retirement by leaving this money to grow.
I know the desire to get a clean slate is a strong one, but it is financially foolish to pay the penalty + normal income taxes on this money. And remember, the taxes on this money will be from the highest end of the tax rates, not the lowest end. Depending on whether you also have state income tax, it is quite possible that you end up paying 40% in penalties and taxes on this money.
Losing at least 1/3 of your money is a stiff price to pay for a clean slate.
Roll it over directly into an IRA. Make sure it’s all handled between the 2 organizations with no check coming to you, to avoid the taxation issues.
If the debt is really gnawing at you, cease all further retirement contributions and attack the debt with that.
Open a Rollover IRA…. In the long run, this will benefit you the most…. The 20% is a low figure… It will be regular income, and you will be subject to federal and state income taxes… And a 10% penalty on top of that…
50% would be a better estimate of how much you will send to the government if you take a lump sum.
First, let me clear up a couple misconceptions.
1.) If this is from his pension, it belongs to him. You cannot put it into your IRA or 401(k) but he could put it into an IRA or 401(k) of his own.
2.) The withholding for taxes is indeed 20%, the early withdrawal penalty (because he is under his pension’s definition of retirement age) is an additional 10% for a total of 30%!
Now the advice part. Taking a retirement plan distribution to pay off consumer credit is not going to resolve the underlying issue, which is that you’re spending more than you make. Even if you take the distribution and pay it off, unless you change your spending habits the debt will just build up again. That some of the debt is medical bills makes it understandable because unfortunate things happen even to responsible people.
Now that I’ve talked you out of the lump sum option (I hope). let’s look at the other two options, his IRA or his 401(k).
An IRA has almost unlimited investment options and you should have no trouble finding good fund managers. You are also the owner of the account. You can take distributions starting at age 59 1/2 without penalty (actually earlier but it’s tricky, seek professional advice first), but you can never borrow from your IRA. Beneficiary options are unlimited, allowing you to determine who gets what if you don’t survive to retirement. If you are sued by creditors, your IRA is protected if you’re in federal bankruptcy proceedings, otherwise, protection is up to state laws which vary.
A 401(k) offers only the limited choices the plan trustees have decided to allow and no others. They get to decide because they are the trustees, you are only a “participant,” not an owner. I’ve seen literally hundreds of 401(k) plans and they usually have 8-30 investment options. Typically a few are very good, most are average and some just plain stink. The plus side is that your plans can allow loans (although I don’t recommend it, it can help you sleep knowing it is an emergency option), retirement age is 55 not 59 1/2 – and it is rock solid protection against creditors. Nobody can touch it.
I am a professional Financial Planner and I side with your husband on this one. In fact, I feel so strongly about this that, if I were he and you wouldn’t agree to both the IRA option and adjust your household budget (you really need to do both), I would do nothing and let it accrue a monthly retirement benefit that won’t be much but will be there and not spent.
Best of Wishes.