What to do with the money?

[MomToOne]

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

This. I was going to chime in and say your expected 20% hit was a serious underestimate, but this post illustrates that better than I would have. 20% may be what they withhold initially, but you will owe more come tax time.

 

[csharpwv]

OK, I am going to be rather insistent when I say this....

DO NOT treat this money like a cash infusion.

This money has been saved over time, and you REALLY have to consider your needs beyond your current 100 year old home.

If this home is your forever home... you don't ever plan on moving... things are a little different. BUT if you and your ex built a brand new home together, then you likely won't be satisfied with a century old home that is indeed in need of constant work, renovation, and upgrades to keep it in decent shape.

Real estate is such a risky investment these days, unlike one time when you could get nearly every dime you put into a house out of a house when you sold - you are lucky to even get your purchase price out now.
Investing $15K+ into a home, you would be luck to get $8-10K back out.

While it is sooooo tempting to make investments in the house to improve the condition of the home, when will you have $20K free and clear to invest again?

Don't take the tax hit, don't take the risk investing in your 100 year old home, and don't run the risk of making this a $20K mistake that you will regret as you near retirement.

Best advice you will receive.... invest this money into a privately held account. That way, this money will grow through investment and will leave you in a better position for retirement with your work account AND your own funds.

Our home is around 70 years old and I know that it needs work, work, and more work. Just when you think the work is done and you can enjoy your home - then you notice something else that needs done!

Or position the funds to be moved into a tax free account over the next few years from a yielding money market account.

Don't spend this money! Save, save, save!

How many people do you know that regret saving too much?
How many people do you know that regret not saving enough?

 

[Buzzsgramma]

A close family member has been divorced for 5 yrs....her ex wanted her to settle on a very small sum on his retirement ...
she has chosen to wait and receive the much larger sum when he retires..
I am surprised your lawyer didnt suggest this...

 

[Marionnette]

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).

I cannot think of a case where she would not be able to access her IRA to make a withdrawal. She would always have the ability to get the money if she absolutely needs it. That should be enough for peace of mind. It would be foolish not to roll the money over because she is worried about "what if something happens, and what if I can't get to my IRA and what if I have to use a credit card instead and pay outrageous interest on it?"

 

[ItsNotMuchofaTail]

I cannot think of a case where she would not be able to access her IRA to make a withdrawal. She would always have the ability to get the money if she absolutely needs it. That should be enough for peace of mind. It would be foolish not to roll the money over because she is worried about "what if something happens, and what if I can't get to my IRA and what if I have to use a credit card instead and pay outrageous interest on it?"

*sigh* not the IRA, the pension. I was responding to one person who said to contribute less to her OWN retirement. Sorry if I wasn't clear about that.

Obviously the better choice is to roll it over, "we" can't always make the better choice. Now, my exSIL cashed out her 401k when she got fired, intending to pay off her car loan and have some savings to get her by. Not a great plan, but she had no other way to get cash and no credit cards to fall back on. Not only did she not know about the tax penalty on it as income, which killed her at tax time, but she didn't even pay off the car and it got repossessed. But my XH's whole family is worse than my 10 year old with money, so I wasn't even surprised. That fact enabled me to keep my entire pension account when we divorced, so its all good.

ETA: I obviously don't know much about IRAs, I have a pension account (required) and a 403b (elective), neither of which can be borrowed against. I would be terrified if I locked that money up so to speak, and then i needed it to fix my house. I have plans for my next 5 tax returns, I have to hope my house cooperates, LOL.

ETA2: It occurs to me the sigh sounds snarky in print (if things can sound anything in print). I don't mean it as snark, I am sorry I ever said anything, and I am clearly not coming across clearly. Sometimes people with financial security don't understand the other side. I have never had financial security for various reasons, and I am working my way there now. It takes a darn long time.

 

[dminnie]

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.

(I can't figure out for the life of me how to put more than one quote in a reply. I see others do it all the time!)

I like the summer job idea for home repairs. Also...not sure what kind of teacher you are, but maybe some tutoring in exchange for $ or help with the house(assuming you find someone with skills and a kid that needs tutoring). Also the idea about renting out a room. I'd say get creative about raising some repair funds!

I'm not sure how old your home is and the extent of the repairs needed. Maybe, before you spend a lot to make the repairs it would be a good time to evaluate if this is the home you really want to stay in or if another home would make more sense.

Yes...to those who say it would probably cost more than %20 in taxes.

Yes..to those who suggest putting it in a retirement account separate from your pension fund. Even with a strong pension fund, you will be glad to have other retirement savings.

No... to the post about leaving it in your ex's account until retirement because it would be a larger sum of money at that time. It will also be a larger sum of money when you retire if you put it into a retirement account that you control and not your ex.

 

[2disneyboys]

I agree with everyone who says to roll it over into a retirment account/ira etc.. The poster who illustrated that if you treat this as "cash" vs retirement money, you'll be lucky to walk away with around $12,000 is actually very accurate. OP would be better to contact her local bank that she works with or credit union or some other financial advisor and set up a retirement account, that should and emergency come up, she can withdrawal (albeit with penalty) or take a loan against should she need to.

Believe me, I understand the $ in the bank is peace of mind perspective, believe me I do, however, if I were in OP's exact position, I honestly believe the only reason I would pull this money out would be to save my child not my house. you can always move if the house ends up being too much. and honestly, unless the 100 year old house is in great condition with most of the "systems" being realitively new, $10-20,000 is not going to be enough to fix everything and "have that worry off your shoulders" so it's possible OP could take the tax hit and early withdrawal penalties, walk away with $10-12,000, sink that into the house, only to find 6-12 months down the line, she's in the same place with some needed home repairs/improvements and ALSO not have $20,000 in her inidividual retirement fund, which leaves her worse off then she started. And I'm not being snarky here or implying OP's house is a wreck by any stretch. My house was built in the early 60's, about 2000 sq feet and is all high end (real hardwood floors (the kind that are like 2 inches thick), hand plaster, etc etc) and DH & I have done a really great job of keeping the house well maintained and I could easly sink $10,000 into our house and still have plenty left to do - so I don't want OP or anyone else to think I am implying her house is a wreck, just saying houses are money pitts. It will suck up whatever money you are willing or able (and sometimes not willing and not able) to feed it and then look at you with this little innocent face asking for more..


Another thing to consider is that in many cases (not all!) retirement funds are "safe" from things like bankruptcy, debt collectors, lawsuits, etc, however $ dumped into a house for "improvements" is not safe for anything really.

Good Luck OP with whatever you choose to do.

 

[2disneyboys]

(I can't figure out for the life of me how to put more than one quote in a reply. I see others do it all the time!)

I like the summer job idea for home repairs. Also...not sure what kind of teacher you are, but maybe some tutoring in exchange for $ or help with the house(assuming you find someone with skills and a kid that needs tutoring). Also the idea about renting out a room. I'd say get creative about raising some repair funds!

I'm not sure how old your home is and the extent of the repairs needed. Maybe, before you spend a lot to make the repairs it would be a good time to evaluate if this is the home you really want to stay in or if another home would make more sense.

Yes...to those who say it would probably cost more than %20 in taxes.

Yes..to those who suggest putting it in a retirement account separate from your pension fund. Even with a strong pension fund, you will be glad to have other retirement savings.

No... to the post about leaving it in your ex's account until retirement because it would be a larger sum of money at that time. It will also be a larger sum of money when you retire if you put it into a retirement account that you control and not your ex.

to "mulitquote" you look in the bottom right corner of the box the quote is in and choose the symbol in the middle (the first symbol is quote, the 2nd has "+ and the 3rd is a Feather) you click this middle symbol for each quote you want to include and on the last quote you want to include, you click the QUOTE symbol (so if you are quoting 4 reponses, the first 3 you select the middle symbol and the 4th you select the quote symbol

LOL, it took me forever to figure it out also

 

[fab5friend99]

Put the money in an IRA. Here are my reasons:
1) you can always borrow money if need to make improvements to your home at a heck of lot lower rate than what it will cost you to take the money now. You cannot borrow money for retirement!
2) If worst comes to worst and you ever have to declare bankruptcy, you retirement accounts are protected.

 

[Luvchefmic]

OK, I am going to be rather insistent when I say this....

DO NOT treat this money like a cash infusion.

This money has been saved over time, and you REALLY have to consider your needs beyond your current 100 year old home.

If this home is your forever home... you don't ever plan on moving... things are a little different. BUT if you and your ex built a brand new home together, then you likely won't be satisfied with a century old home that is indeed in need of constant work, renovation, and upgrades to keep it in decent shape.

Real estate is such a risky investment these days, unlike one time when you could get nearly every dime you put into a house out of a house when you sold - you are lucky to even get your purchase price out now.
Investing $15K+ into a home, you would be luck to get $8-10K back out.

While it is sooooo tempting to make investments in the house to improve the condition of the home, when will you have $20K free and clear to invest again?

Don't take the tax hit, don't take the risk investing in your 100 year old home, and don't run the risk of making this a $20K mistake that you will regret as you near retirement.

Best advice you will receive.... invest this money into a privately held account. That way, this money will grow through investment and will leave you in a better position for retirement with your work account AND your own funds.

Our home is around 70 years old and I know that it needs work, work, and more work. Just when you think the work is done and you can enjoy your home - then you notice something else that needs done!

Or position the funds to be moved into a tax free account over the next few years from a yielding money market account.

Don't spend this money! Save, save, save!

How many people do you know that regret saving too much?
How many people do you know that regret not saving enough?

Totally agree with this poster I also kept thinking of that movie "The Money Pit"

 

[MrsPete]

A close family member has been divorced for 5 yrs....her ex wanted her to settle on a very small sum on his retirement ...
she has chosen to wait and receive the much larger sum when he retires..
I am surprised your lawyer didnt suggest this...

Disagree. Sure, she could wait 'til retirement age and have X-percentage of his retirement . . . but consider:

Between now and then she'll have no control over how he manages that money. He could stop contributing altogether, he could borrow against it (which would mean it wouldn't grow), he could choose poor investment options.

It's much better for her to have her percentage now, and SHE can control how it's invested. Whether she does well or does poorly, it's up to her: And if she invests it well, it'll grow under her supervision, just as it would've grown under his. Plus, it cuts off ties with him, which is better emotionally.

Put the money in an IRA. Here are my reasons:
1) you can always borrow money if need to make improvements to your home at a heck of lot lower rate than what it will cost you to take the money now. You cannot borrow money for retirement!
2) If worst comes to worst and you ever have to declare bankruptcy, you retirement accounts are protected.

Sound logic.

 

[Bob NC]

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).

You can "what if", all you want but don't think anyone else should?

If you roll the money into a retirement account for yourself the money will still be there.

Why take the cash now with a lot of penalties when you don't need the money now. If you absolutely need the money later, you can get it later and pay the penalties then.

 

[believenfaith]

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

Conversely, if you put it into an IRA and do not touch it for 20 years, it will be worth $44,451.64 (assuming a modest 4% return).

 

[manning]

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

You hope. More and more pension plans look great until that word "underfunded" pops up. That means all those promises don't mean anything because the money promised is not there for you.

Put the money into some sort of savings and tackle the expenses when needed.

 

[manning]

Replacing windows is expensive. Take a look at this is may help you make a decision. When you start looking at it you may say why the airplane. Bear with the video and watch it all. It helps explain everything.

http://www.youtube.com/watch?v=Ind2jswZuX0

Eventually you may want to do a full replacement.

 

[sarah4770]

look at the bigger picture and decide if this house is a good choice for you. it might be a roof this year and a furnace next year. the point is , if you cannot afford to maintain it, the money will be lost regardless of what you do with the settlement. try to take a longer term view.

 

[tvguy]

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

'

This. In the words of Suze Orman, and just about every other financial expert, NEVER EVER EVER EVER EVER EVER EVER use retirement money for something else.

 

[searlproudbottom]

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

Give the money back to your Ex Husband. He earned it and according to your post you have earned your own retirement . I am sure that your attourney has earned his fee. I am also sure that I will get some heat from this post.
But hey whats right is right. If you were a stay at home Mom that would be a different story.You chose your profession and the pay that comes with it.
Give the money back and you will feel good about it for the rest of your life.

 

[bluejasmine]

I'd go ahead replace all the items in your home now like the roof, furnace, water heater do the driveway and windows maybe an appliance or two. You can lower your insurance with the new roof, lower your electric with the new windows & claim the energy efficient appliances & upgrades on your taxes!!

ASMU/POR Dec 16-22, 2012 & POFQ Sept 8-15, 2013

 

[pearlieq]

But hey whats right is right. If you were a stay at home Mom that would be a different story.You chose your profession and the pay that comes with it.
Give the money back and you will feel good about it for the rest of your life.

Part of me really doesn't want to dignify this with a response, but it's just SO wrong that it should be addressed.

You have no idea the terms of their financial settlement. How do you know he didn't get the majority of their home equity, or their fully paid cars/trucks, or their DVC membership? How do you know he wasn't completely strapped for cash and she let him have their liquid assets in exchange for a portion of his retirement to help him out? Or maybe that she graduated college with no loans but worked to pay back 50k of his loans during the marriage?

Divorce settlements aren't tit-for-tat. They are (or at least should be) an equitable division of a couple's total financial picture.

I'm not sure why you feel qualified to declare what's "right" in this situation.