What to do with the money?

[Minnie_me]

So my divorce is finally final, and I'm about to get $20,000 from my ex's retirement fund. My original plan was simply to put it right into another retirement fund and forget about it. However.......after the divorce, I had to sell our beautiful new home that we had built, and buy a smaller, older home. After only 3 years in this house, I can see how much money is needed to just simply maintain an old house, and I'm worried about it! The house is 100 years old, and it would be nice to have a savings account for house maintenance. Right now, I need a new driveway and new windows. Soon it will need a new roof, and I'm sure the furnace and water heater won't last forever.

I'm NOT savvy with money. I've gotten wonderful tips and advice from people on this Board in the past.

So, WWYD with the money? If I put it into savings for house maintenance, I will take a 20% tax hit.

I should also mention that I am a teacher, and have a pretty good retirement plan for myself.

 

[3BoysRDisneyFreaks]

So my divorce is finally final, and I'm about to get $20,000 from my ex's retirement fund. My original plan was simply to put it right into another retirement fund and forget about it. However.......after the divorce, I had to sell our beautiful new home that we had built, and buy a smaller, older home. After only 3 years in this house, I can see how much money is needed to just simply maintain an old house, and I'm worried about it! The house is 100 years old, and it would be nice to have a savings account for house maintenance. Right now, I need a new driveway and new windows. Soon it will need a new roof, and I'm sure the furnace and water heater won't last forever.

I'm NOT savvy with money. I've gotten wonderful tips and advice from people on this Board in the past.

So, WWYD with the money? If I put it into savings for house maintenance, I will take a 20% tax hit.

I should also mention that I am a teacher, and have a pretty good retirement plan for myself.

Well replacing the windows furnace and water heater would save money in the long run with upgrading to something energy efficient. A new roof might too if you reinsulate. I am not good with this either. The 20% hit isn't good. It is good that you are set at your job.
Sorry about the divorce.

Sarah

 

[marlynnp]

Are you making contributions to your current retirement plan?

If so, the easy thing would be to roll the $20,000 to your retirement and reduce your contribution and bank that money regularly into an account for house repairs.

I have direct deposit and I have a bank account just for my property expenses each pay a portion goes to that account first to cover my mortgage, insurance, taxes and few thousand extra yearly to accrue for major repairs/replacements.

 

[Marionnette]

So my divorce is finally final, and I'm about to get $20,000 from my ex's retirement fund. My original plan was simply to put it right into another retirement fund and forget about it. However.......after the divorce, I had to sell our beautiful new home that we had built, and buy a smaller, older home. After only 3 years in this house, I can see how much money is needed to just simply maintain an old house, and I'm worried about it! The house is 100 years old, and it would be nice to have a savings account for house maintenance. Right now, I need a new driveway and new windows. Soon it will need a new roof, and I'm sure the furnace and water heater won't last forever.

I'm NOT savvy with money. I've gotten wonderful tips and advice from people on this Board in the past.

So, WWYD with the money? If I put it into savings for house maintenance, I will take a 20% tax hit.

I should also mention that I am a teacher, and have a pretty good retirement plan for myself.

As tempting as it is to take the windfall and use it for the house, a $4K hit for the early withdrawal is more than I would want to take. I would roll it over into an IRA and let it grow. There's no way that energy-efficient appliances are going to make up for that kind of loss over the life of the appliance. You have to consider not just the $4K tax hit, but also the loss of interest you would have earned over the years.

 

[a742246]

I would put that money into a retirement account, and get a home equity loan and use it only for home emergencies.

 

[Jillscabanastories]

Save it for yourself, your own retirement

 

[JeRmS]

Take the $4k Tax hit, put the rest in a savings account and use it to do your house upgrades .... here's why

Putting the money back into another retirement will save you $4k sure, but if you reduce your holdings from your other retirement how long would it take you too build up $16K? ... I assume a while, and if soemthing goes wrong with your house ... then what, take a loan to fix?

It's $16k you didn't have before.

The other thing to remember here is ... IF you replace Windows and those other items with approved energy efficient replacements the government gives tax breaks for those items so you could potentially make up the $4k on the backside!

That's what I would do but by no means am I "savy" with money! I am one that believes in spending and living life because you can't take it to the grave with you!!!

 

[scrapquitler]

I would put that money into a retirement account, and get a home equity loan and use it only for home emergencies.

Alternatively, I think you could put the money into the retirement account then take it back out as a loan, you end up paying the money back to yourself with interest, and you avoid the tax hit. I'm not exactly sure how thus works, but I've heard Clark Howard talk about it in his show, so there's probably information about it on his website.

 

[natfrac]

Double check the tax liability. Since it's a settlement I'm not sure if you'd have to pay the 10% penalty for early withdrawal on top of any federal/state taxes.

 

[dminnie]

It's $16k you didn't have before.

This is not true. Maybe if it was an inheritance. This is a divorce settlement. What was his was yours all along.

I'd roll it over and look for ways to save for house maintenance.

 

[ilovemk76]

So my divorce is finally final, and I'm about to get $20,000 from my ex's retirement fund. My original plan was simply to put it right into another retirement fund and forget about it. However.......after the divorce, I had to sell our beautiful new home that we had built, and buy a smaller, older home. After only 3 years in this house, I can see how much money is needed to just simply maintain an old house, and I'm worried about it! The house is 100 years old, and it would be nice to have a savings account for house maintenance. Right now, I need a new driveway and new windows. Soon it will need a new roof, and I'm sure the furnace and water heater won't last forever.

I'm NOT savvy with money. I've gotten wonderful tips and advice from people on this Board in the past.

So, WWYD with the money? If I put it into savings for house maintenance, I will take a 20% tax hit.

I should also mention that I am a teacher, and have a pretty good retirement plan for myself.

I would put the money into your retirement account. Setup a Vanguard account and move it there. Your house will not put food on the table when you are too old to work.

Then I would look at my house and probably put it for sale and then rent for a while. Once you know exactly how your finances are going, after you max out your way behind retirement accounts, then go looking for a home that you can easily afford.

 

[Marionnette]

Take the $4k Tax hit, put the rest in a savings account and use it to do your house upgrades .... here's why

Putting the money back into another retirement will save you $4k sure, but if you reduce your holdings from your other retirement how long would it take you too build up $16K? ... I assume a while, and if soemthing goes wrong with your house ... then what, take a loan to fix?

It's $16k you didn't have before.

The other thing to remember here is ... IF you replace Windows and those other items with approved energy efficient replacements the government gives tax breaks for those items so you could potentially make up the $4k on the backside!

That's what I would do but by no means am I "savy" with money! I am one that believes in spending and living life because you can't take it to the grave with you!!!

The bolded part is untrue. She was always entitled to this money and if the marriage had stayed intact, she would have been entitled to her spouse's retirement money, even if he were to precede her in death.

The OP will always have the opportunity to withdraw early from a retirement fund in the event of a true financial emergency. To take a $4K hit in order to have some sort of cushion now does not make good financial sense.

The tax credits for energy-efficient improvements to your home is 10% up to $500 (windows are capped at $200, furnaces have a maximum of $150). It's not enough to make up for a 20% tax penalty. She won't recover the full $4K loss on tax incentives alone.

 

[wiigirl]

Save it for yourself, your own retirement

 

[ItsNotMuchofaTail]

If OP is like me, she can't borrow or withdraw on her own retirement, nor can she change what she puts into it. Here, our pension contribution is a set % of our salary and is unalterable or borrowable (is that a word lol).

As a single mom with an older home, who is also a teacher, I say take the cash. I understand it isn't the best financial move to make, but if I could have even $10k in savings for major repairs I know are coming it would give me enormous piece of mind. You have to value that as well. It isn't always just about the bottom line IMO. I don't have enough equity in my house to borrow against it.

 

[Disflyer]

Just some more food for thought on the early withdrawl, the liability is more than just the penalty, you will also be taxed on the withdrawl as income (assuming this is from a standard 401k and not a roth 401k). So if your effective tax is 28% and state income tax of 5% (for argument) your actual tax would be 10% penalty + 28% federal tax + 5% state tax. Or another way

20,000 withdrawl
- Early Withdrawal Penalty(10%) $2,000
- Required Federal tax withholding (20%) $4,000
- Additional federal taxes you will owe (8%) $1,600
- State tax you will owe (5%) $1,000
= Amount You Receive: $11,400

 

[Marionnette]

If OP is like me, she can't borrow or withdraw on her own retirement, nor can she change what she puts into it. Here, our pension contribution is a set % of our salary and is unalterable or borrowable (is that a word lol).

As a single mom with an older home, who is also a teacher, I say take the cash. I understand it isn't the best financial move to make, but if I could have even $10k in savings for major repairs I know are coming it would give me enormous piece of mind. You have to value that as well. It isn't always just about the bottom line IMO. I don't have enough equity in my house to borrow against it.

She doesn't need to put it into her pension fund. She can set up her own personal IRA, separate from the teachers' retirement plan that she has, and roll it into that. She doesn't have to add a dime to it ever again if she doesn't want to. But it would be there to draw upon in the event that she absolutely needs it. There is no need to take the $4K hit right now because of what she *might* need in the future.

 

[MrsPete]

How secure is your state's teacher pension, and are you fully vested? I'm a teacher too, and I'm concerned about the future of our pension. I've been "in" for more than two decades and have a great deal invested in the pensions, so I think people like me are fairly safe; however, the younger teachers who are just coming into the system are already being promised a "lesser" pension than the one I'll receive, and I wonder if this HUGE benefit won't disappear altogether one day. You might say, "So what? I'm already 'in', and that'll only affect new hires." But consider this: Suppose you marry again, decide to stay home with children for a few years -- you'll retire as a new hire. Suppose you become sick and are required to take a few years off -- you'll return as a new hire. This is scary.

The big point: Never let your pension be the only egg in your retirement basket.

I say put the money into a separate retirement account, something NOT hitched to your school pension. It's good to have multiple sources of income for retirement, and how many times in your life will you have $20,000 to depost again?

You'll ALWAYS be able to find a purpose for the money: Home repairs are a legitimate concern, but next year or next year or the next, something else will always come along. It's easy to justify not saving.

Summer is coming. I suggest you look for a summer job and dedicate those earnings to the home repairs. When school starts next fall, start a savings account JUST FOR home maintenance, and have 5% of your salary directly deposited into that account. That way, when your roof does need replacing, you'll be prepared. Another option: Your post gives me the impression that you live alone. Is there another teacher at your school who might make a good roommate? If you "put the word out", I bet you'll find someone. That's a time-honored way to bring in income, AND it'll help another person.

One last thing, you say you're not money-saavy. You recognize a shortcoming in your talents and abilities -- good, knowing that is a starting point. Right now is not a good time for teachers to take on new projects, but your summer homework is to BEGIN TO BECOME money-smart. Choose a book a week from the library and learn how to manage your money. Read something on frugal living, something on home repair, something on budgeting, something on retirement savings, something on investing. Some people are born with an innate knack for handling money, others have to work at it -- but no one is incapable of learning the basics.

 

[MrsPete]

Just some more food for thought on the early withdrawl, the liability is more than just the penalty, you will also be taxed on the withdrawl as income (assuming this is from a standard 401k and not a roth 401k). So if your effective tax is 28% and state income tax of 5% (for argument) your actual tax would be 10% penalty + 28% federal tax + 5% state tax. Or another way

20,000 withdrawl
- Early Withdrawal Penalty(10%) $2,000
- Required Federal tax withholding (20%) $4,000
- Additional federal taxes you will owe (8%) $1,600
- State tax you will owe (5%) $1,000
= Amount You Receive: $11,400

Sadly, this is correct. It's just too expensive to use this money.

 

[Gumbo4x4]

Another vote for rolling it over.

 

[ItsNotMuchofaTail]

She doesn't need to put it into her pension fund. She can set up her own personal IRA, separate from the teachers' retirement plan that she has, and roll it into that. She doesn't have to add a dime to it ever again if she doesn't want to. But it would be there to draw upon in the event that she absolutely needs it. There is no need to take the $4K hit right now because of what she *might* need in the future.

Someone suggested lessening what she contributes to her own retirement to have more cash in hand each payday to save for home repairs, she can't do that is what I meant.

My point is the piece of mind is worth something, it isn't entriely about the bottom line. As a single mom, piece of mind is worth a lot to me. You can "what if" all day, but what if she can't access that money and has to use a credit card for thousands of dollars of home repairs - the interest paid on a CC can be high, and the stress of the debt can be overwheling (as someone who has a lot of debt I know, unfortunately).