New Job/Old Retirement fund ?

[tlenzendorf]

I start a new job next month. I will have a pension fund that the new employer puts 6% of my salary in, plus optional 401k.

I am wondering what to do with my pension at my current job. If I cash it out it would pay off all my debt(freeing up ~$700/month in bills). I am not currently contributing to a 401k. I would put $200/month into the 401k. The fund after cashing out/taxes/penalties is worth ~$25k. I have ~$20k in debt, so I would have ~$5k to put into some sort of fund right away.

Is it better to A. Leave the pension or B. Cash it out, pay off debt and then start again with a pension AND 401k?

I have about 25 years left before I can retire(and that would be an early retirement), so lots of time to save.

 

[Darcy03231]

I start a new job next month. I will have a pension fund that the new employer puts 6% of my salary in, plus optional 401k.

I am wondering what to do with my retirement fund at my new job. If I cash it out it would pay off all my debt(freeing up ~$700/month in bills). I am not currently contributing to a 401k. I would put $200/month into the 401k. The fund after cashing out is worth ~$25k. I have ~$20k in debt, so I would have ~$5k to put into some sort of fund right away.

Is it better to A. Leave the pension or B. Cash it out, pay off debt and then start again with a pension AND 401k?

I have about 25 years left before I can retire, so lots of time to save.

If you cash out your retirement account before retirement age you will have to pay the tax on it and a penalty (I believe its 10%). So by the time you took out the $25k, paid the tax and penalty on it you'd have a lot less than $25k. Depending on your tax bracket, probably somewhere around $13k-$15k.

My vote would be to leave it in a retirment account.

 

[tlenzendorf]

If you cash out your retirement account before retirement age you will have to pay the tax on it and a penalty (I believe its 10%). So by the time you took out the $25k, paid the tax and penalty on it you'd have a lot less than $25k. Depending on your tax bracket, probably somewhere around $13k-$15k.

My vote would be to leave it in a retirment account.

The $25k would be whats left after all the taxes and fees. I went back and fixed the post so that part is more clear

 

[Marionnette]

The $25k would be whats left after all the taxes and fees. I went back and fixed the post so that part is more clear

You would still be losing a major chunk of change. Not to mention the compound interest on the investment that you will not be getting at retirement.

Roll the old retirement account over into an IRA if you don't want to leave it with your former employer. But find another way to pay off your debts. Look at it this way. If you were not moving to another job, would you have raided your retirement account in order to pay off those debts? Probably not.

 

[poober25]

You know yourself better than anyone...are you disciplined enough not to get yourself back into debt? If so, I would cash it out, but like pp said, you're going to have to pay tax and penalties, so make sure you do the math first.

DH and I may be facing the same situation soon. We stopped using credit cards about 4 years ago, except for a few VERY limited situation. (less than $500 in all that time) We haven't been able to make much progress on paying them off, though. So, we will probably cash out and pay off if it comes to that. HTH

 

[drinkme]

I would do that. Only if you know you won't get into debt again.

Did the paperwork you received say what you're monthly amount would be at full retirement age? If it's substantial, then you may want to reconsider.

Let us know what you finally decide to do. I know you're not the only one who is considering doing the same thing.

 

[drinkme]

You would still be losing a major chunk of change. Not to mention the compound interest on the investment that you will not be getting at retirement.

Roll the old retirement account over into an IRA if you don't want to leave it with your former employer. But find another way to pay off your debts. Look at it this way. If you were not moving to another job, would you have raided your retirement account in order to pay off those debts? Probably not.

I don't think a pension fund works the same as an old 401k from a previous employer. I may be wrong, but I think if he wants to roll over the pension into an IRA, he would still have his old employer take out the 20% tax (mandatory), THEN he would have to come up with that 20% in cash to replace it in order to not pay the 10% penalty. There may be a few cases where the 10% penalty is waived. The OP needs to look into this to see if he qualifies for it.

 

[tlenzendorf]

I don't think a pension fund works the same as an old 401k from a previous employer. I may be wrong, but I think if he wants to roll over the pension into an IRA, he would still have his old employer take out the 20% tax (mandatory), THEN he would have to come up with that 20% in cash to replace it in order to not pay the 10% penalty. There may be a few cases where the 10% penalty is waived. The OP needs to look into this to see if he qualifies for it.

I'm a she

But what would happen is that the employer would take out the fees and taxes. I would not be able to waive anything since I am under 55 years old.

And yes, I would be responsible enough to stay out of debt this time. It's all old debt that's about 5 years old that I've been working on. Young, dumb mistakes!

 

[drinkme]

I'm a she

But what would happen is that the employer would take out the fees and taxes. I would not be able to waive anything since I am under 55 years old.

And yes, I would be responsible enough to stay out of debt this time. It's all old debt that's about 5 years old that I've been working on. Young, dumb mistakes!

Oops...sorry about the gender assumption!

Dh and I are deciding this very thing. The information we have regarding cashing in our old pension (and this is a pension, not a 401k) is that the employer would take out the 20% taxes which is mandatory. When we file our taxes in Spring 2012 is when we would pay the 10% penalty. We would have to claim the whole amount (including the 20% taken out), but use that 20% towards what we have paid into taxes. So, if your income is very low, then you may get some of that back. If your income is high and you have no other substantial deductions, then you may have to pay more than the 20%.

There are circumstances when you can waive the 10% penalty. I know we do not qualify for any of them so I don't remember all of them, but some of them include certain types of debt (like an old IRS debt), using the money for first time home buying, use the money for higher eduction, etc.

And like I mentioned in the previous post. If you do decide to roll it over into a IRA, you'll have to come up with the 20% they took out in order to waive the 10% penalty.

Now, this is what we took out of all of our research into this. It may in fact be wrong...lol.

HTH!

 

[tlenzendorf]

Oops...sorry about the gender assumption!

Thats ok
Now, this is what we took out of all of our research into this. It may in fact be wrong...lol.

HTH!

What you said is exactly what I am looking at. I just don't know if it's better to keep the pension and stay in debt or totally start over being able to put money into the 401k plus having a new pension starting for me. I would start off completely debt free at least.

My income is lower middle class, so I wouldn't have to worry about it getting taxed higher.

 

[SandrA9810]

If you're putting $700 towards the debt now, how much would you be able to put towards your 401k if you paid the debt off.

I guess you need to do the long term math. Financially it sounds better to be earning a little interest than paying a lot of interest. How fast would you be able to return that 25k to your retirement?

It's a lot of math and calculations between what you're paying now, expected pay off date.
Then if you took out the pension, how fast would you earn it back into your 401k.
How much would you gain in interest if you put 700 back in? How much would you pay in interest at current pay off rate?

Is there an increase in pay to apply more money to the debt or 401k?

 

[tlenzendorf]

The long term math is what is killing me. I would put $200/month into the 401k(which I do not have now), plus the pension that the new company puts in(~$150-200/month).

I am thinking that it seems to make more sense to get everything paid off. Then I can be debt free, setting aside more money than into a 401k than I am now(I set nothing aside due to debt), be able to start an emergency fund and earning a "regular" amount of interest. Instead of gaining a little interest but also paying out a lot of interest plus the principles. Honestly I think I'm paying more in interest towards the debt per month than I am earning in the pension fund(especially with the market being low/slow).

I just wanted other's opinions to help clear my head. A new job at a new company after leaving the one I've had for 11 years has my head spinning already. It's very nice to be recruited and get a better job, though. Just a little scary.

 

[marlynnp]

If you're freeing up $700 a month, why only $200 into the 401K?

 

[tlenzendorf]

If you're freeing up $700 a month, why only $200 into the 401K?

I need an emergency fund and a new car. I should say new-to-me used car. I will drive the one that I have until it needs too much in repairs to be worth it, but it would be nice to have a chunk saved up instead of financing so much. I have almost 170,000 miles on my current car. Plus we will be needing a new furnace/AC in the next couple years. I want to be able to pay for that outright instead of financing anything.

After I got those couple of things taken care of then I would put more into the 401k.

 

[Judique]

I need an emergency fund and a new car. I should say new-to-me used car. I will drive the one that I have until it needs too much in repairs to be worth it, but it would be nice to have a chunk saved up instead of financing so much. I have almost 170,000 miles on my current car. Plus we will be needing a new furnace/AC in the next couple years. I want to be able to pay for that outright instead of financing anything.

After I got those couple of things taken care of then I would put more into the 401k.

Leave the pension alone and concentrate on paying down your debt.

Using the pension money is too easy a way of getting rid of the debt - the debt will come back again because you have not changed your spending habits and the money will be gone. You'll be back where your started and not have the pension.

Why do I say this? Because part of your plan is to spend money - car, furnace. Those are future needs, but you should start a different plan to get them filled.

 

[tlenzendorf]

Leave the pension alone and concentrate on paying down your debt.

Using the pension money is too easy a way of getting rid of the debt - the debt will come back again because you have not changed your spending habits and the money will be gone. You'll be back where your started and not have the pension.

Why do I say this? Because part of your plan is to spend money - car, furnace. Those are future needs, but you should start a different plan to get them filled.

Actually I have changed my spending habits. I used to charge EVERYTHING when I was young and dumb when it came to finances. Now I charge NOTHING except for emergencies. If I pay off the debt then I won't need to charge for emergencies even, I will have funds saved up for things like the car and the furnace. I didn't say I was going to run right out and buy a car and a furnace, I am going to save for them.

 

[francie57]

Don't forget one other thing if you cash out, you will have to claim that as income on your fed/state taxes and you may owe more money when you file your tax returns. I would talk to a financial expert at your bank and roll it over into an IRA. When my husband was laid off two years ago, we rolled his pension from the old job into an IRA and there are no penalties or taxes to be paid since you never directly handle the money (even if a check is sent to you to put into your new account, it won't be made out to you).

 

[SandrA9810]

The bigger question is, do you want to live now? Or live 20 years down the road when you can retire?

Sometimes you have to think about the here and now, and how you want to be living your life. What happens if you have to finance a car in a year? That's more debt compounded on to the pile, one more bill to pay each month.

Some people are content to downsize and live frugal after retirement, some people want to live like a king after retirement.

Besides the cost of inflation, can you reach your retirement goals by retirement age? Have you set any of the goals or how much you'd need to live comfortable later on?

Do you really plan on fully retiring from work or do you plan on a small part time job for something to do? Seems like you're ready for this weight to be lifted off your shoulders and start living your life. At least you're not trying to declare bankruptcy or anything like that. It is your money you earned, it's just the government gets to dip it's fat hand into the pile before you get it.