Need advice on closing retirement account.

DolceMiaMarch 24, 2008

I usually lurk on the craft pages, but I have a problem and someone suggested I try here. My DH's company is closing and the employees are being given the balance of their retirement savings plan. DH did not contribute to this account so he is looking at this as free money, a few thousand; but I feel there will be penalties and taxes to be paid on this money. Who do I need to talk to about this? A financial advisor or a tax advisor? I was told we will have to pay a 10% penalty for early withdrawl (which I think is rediculous since the company is the one closing the account not us) but I was also told we could pay a 28% tax on this money when we do our taxes next year, I won't have 28% left next year. Any advice? Where do I turn for assistance.

Thanks in advance for ANY help.


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I think to avoid paying a penalty you must roll it over into another retirement vehicle. If he did not contribute, why is he collecting?

    Bookmark   March 24, 2008 at 5:26PM
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Unless your husband is at least 59 1/2 years old, there will be a 10% penalty in addition to owing income tax.

Most likely the 10% would be withheld when it is distributed. YOu would need to set aside what will be owed in income tax (if you are in the 28% bracket, then don't spend 28% of what you receive).

As an alternative, your husband can open an IRA account and roll over the entire amount to it - no tax owed and no penalty.

If you seek professional advice, make sure they are a CFP (Certified Financial Planner) or a CFA (Certified Financial Advisor). Otherwise you may find yourself being subjected to a sales pitch for life insurance or something else you may not need.

My advice (free) is open an IRA, roll over the entire amount and pretend it isn't there - except when you contribute to it.

    Bookmark   March 24, 2008 at 5:52PM
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Roll it over to an IRA. Do a Roth if you have at least 15 yrs until retirement and can afford to pay the income tax.

Do NOT spend it. It is not "free money"! I once took my company retirement account when I left employment, to deal with a financial emergency. Big, big mistake - I lost almost 50% to taxes.

Open the IRA at any low-cost, discount brokerage. If your DH insists upon taking the money in cash, talk to a tax advisor and have your financial info ready; they can calculate for you how much of the funds you will lose to the IRS. And tax advisors are all getting backed up around now, so I suggest you find one immediately.

    Bookmark   March 24, 2008 at 8:24PM
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Chemocurl zn5b/6a Indiana

I agree...roll it over into an IRA. You can open an account now, and have it ready when the money is released/distributed.

It is likely that if you put it into a 'regular' IRA, that no taxes or penalties will be owed whatsoever. You can just have it put into a money market account within the IRA until you decide what you want to buy with it stocks, bonds, mutual funds, etc.

Years ago my company distributed some stock to the employees that had been held in a plan. Most of my friends sold it and went on shopping sprees to the tune of about $5,000.
I held on to mine, (there was nothing I needed or really wanted anyway)putting it into an account. It is now worth $35,000.


    Bookmark   March 25, 2008 at 12:12AM
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Thank you so much for all your help. Unfortunately not so DH will not save any money for retirement, he is against it, and will be spending "his winfall". I just needed to understand the consequences if he does it.

His company's division is closing in May due to downsizing, and the company decided to give them their retirement plan as part of their severance package.

Thanks again for all your help.


    Bookmark   March 25, 2008 at 7:06AM
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Heres another vote for a DIRECT rollover from your DHÂs companyÂs retirement plan to an IRA. Have the company send the funds straight to the new IRA. DonÂt let them cut a check made payable to your DH.

If you do decide to take the money and spend it, it will be taxable at your marginal tax rate. And you probably would owe a 10% penalty on it. If your DH is over the age of 55 and is separating from the company, there is an exception to the penalty.

I suggest that you talk to an experienced tax person to explore your options.

    Bookmark   March 25, 2008 at 7:07AM
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>>Unfortunately not so DH will not save any money for retirement, he is against it, and will be spending "his windfall". Your DH needs some serious retirement education and so do you. You are very likely to outlive your DH - what kind of retirement savings are you personally doing? Retirement savings are what allows you some options as you age - unless you really enjoy the prospect of eating dog food and ending up in one of those hideous state-run nursing facilities.

I do understand that many people dislike anything that even suggests death or old age. But this is a fear to overcome, it should not be allowed to rule (and possibly ruin) your life.

I remember how appalled I was when my FIL proudly told me that he had just canceled his life insurance policy because "I was just wasting money on it."

Before I could stop myself I snapped back, "You mean you don't intend to die someday?"

A year later he suffered a serious heart attack and became uninsurable. He hung on (modern medicine is wonderful) for another 9 years, but finally died of congestive heart failure.

His widow could have really used that insurance money. She could have possibly stayed in her home longer. She ended up house-rich and cash-poor, so we had to convince her to sell her beloved house - fortunately before the RE market fell.

I sincerely hope you and your DH can work together to increase your overall financial knowledge. It sounds like you both need help or you may flounder needlessly from one issue to another. I wish you the best of luck.

    Bookmark   March 25, 2008 at 11:18AM
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Chemocurl zn5b/6a Indiana

I guess one should be very aware of the terms of the severance package and the purpose of the distribution. It may, or may not delay one getting their unemployment benefits. If it does, one might not want it rolled over to an IRA, and then have to have the unemployment delayed too.
I assume your DH has a copy of the proposed package. I would think it wise to take it and talk to the unemployment office, b4 hubby spends his windfall, and has no income, and no job for any length of time.

What about health care insurance. Will that stop as well. Will he need to pay the big expense of COBRA, or is he covered elsewhere? Are you covered as well?

I hope it works out well for you both.


    Bookmark   March 25, 2008 at 2:25PM
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If he spends it, tell him he's going to only be able to spend half of it and keep the other half for taxes next year.

    Bookmark   March 25, 2008 at 4:31PM
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"Who do I need to talk to about this? A financial advisor or a tax advisor?"

If you talk to a tax advisor, I would make sure he/she is a CPA.

Links that might be useful:

Company in trouble? Protect your 401(k)

Getting Your Retirement Money Early -- Without Penalty

Can My Employer Steal My 401k?

IRS rules for early IRA withdrawals

10 Things Your 401(k) Provider Won't Tell You

    Bookmark   March 26, 2008 at 9:47AM
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Some benefits require a spouse to be notified and to sign away his or her rights before there can be a distribution.

Far as I know ANY money you receive that is not return of capital is taxable income (including the government 'stimulus package' of $600 pp for many).

    Bookmark   March 26, 2008 at 10:46AM
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Lots of good advice here. Let me tell you, I've done this. I quit a job because I was burned out, stressed out, and I moved to a new city without a job. So, I used my $50,000 payout to live on and spend. :( I was so stupid. I had put some money away for taxes, but not enough. Note that this money is taxable in the year it was received, so my tax liability increased by $19,000! I had a balance to pay of $6,000. The IRS was happy to put me on their payment plan. With interest and penalties it was costing me 18% a year. Took many years to pay off (unemployed, remember?) Sure, spending it is fun, just remember you pay a big penalty for doing it. My job is working with IRS regulations, so I did it even knowing what I was getting into. Just that my plans didn't go as expected.

    Bookmark   March 27, 2008 at 12:12PM
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I also vote for a direct rollover. I just recently rolled a 401k into a traditional IRA. I couldn't imagine cashing out. You'll be socked with a lot of taxes and penalties for doing so. Make sure you check with a tax adviser.

    Bookmark   March 27, 2008 at 1:56PM
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They used to say that a retirement plan was based on what was called a three-legged stool.

When we used to milk cows, some neighbours mailed a flat board across a length of tree branch to make a one-legged stool that they used when sitting next to the cow, pail held between knees, while they milked her. Using such a stool, constant attention was needed to maintain equilibrium. If you were out late at night before, and fell asleep on that stool during next evening's milking ... spilled milk, plus sore head (plus companions' laughter).

We had a three-legged stool - much more stable (but I still don't advise going to sleep while milking - knees relax, pail falls, even should you avoid falling over ... companions laugh).

The three-legged retirement preparation stool used to be composed of:
-government pension ... Social Security;
-private pension ..., plus
-personal tax-deferred retirement account ... plus regular investments.

Many say that Social Security is in serious trouble, these days ... especially when you consider the situation in a few years, as a large number of Boomers are now approaching retirement.

When your husband retires, will there be Social Security income available to him? How far will he be able to travel, ... no, how much will he be able to eat ... on maybe $15.00/mo. (wild guess)??

Many private pension programs have been phased out, these days. Your husband now has a retirement account, some credit toward a private pension, to which he did not contribute. And it's being phased out ... by being given to him.

It seems that he has not put a tax-deferred retirement account into place, in that he doesn't believe in preparing for retirement.

It doesn't sound as though he has developed a substantial investment program, apart from pension-related systems available.

So, it appears that he plans to approach retirement nearly naked, income-wise.

What does he plan to use as income, 6 months after he retires?

What income source 6 years after retirement?

How about 16 years later? A great number of people live that long.

How about 26 years later?

Or, if he's no longer here, what about ways for you to meet your necessary expenses? You'll likely outlive him.

And, to add insult to current injury, ... at the present time, he plans to eat up, right away, the only pension-related asset that he has.

If he lacks investment to carry him through a number of years following retirement, does he plan to die a couple of months after he retires???

Would you do me a favour?

Next time you get near him, look into one of his ears, please.

Can you see the air out through the other ear?

If he won't invest that small retirement asset that he has ... **insist** that he give you half of it, so that you can have something to live on after those pay cheques stop.

After his current work stops, will he be able to find replacement? At anything like current rate of monthly/annual income? How secure?

I agree fully with several of the messages earlier, especially what jkom51 said.

Will he go with you to the human resources section of his company to learn what they know of the best, including tax-efficent, ways to deal with the severance package?

Can you go alone?

Please find out the rules that apply to different ways of making that withdrawal, or transferring to a retirement account, with the tax implications for each and get busy on making what preparations that are open to you.

Good wishes for building your wisdom with regard to how to manage your current income, and your assets, most effectively.

ole joyful

P.S. Do you have an income?

You'd better make strenuous efforts to save and invest a substantial amount of it, and make it your business to learn how to manage money effectively, because, as jkom51 said, there's a good possibility that you'll outlive that guy.

Sorry that I've felt it necessary/essential to be such a spoil-sport.

o j

P.P.S. Have you ever been through a train-wreck?

Your husband's a retirement-train-wreck just waiting to happen.

When it's too late to recover.

Except for being forced to go out to work at age 80, regardless of (even chronic) illness or decrepitude.

(still) o j

    Bookmark   March 28, 2008 at 3:29AM
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If he insists on spending it, I agree w/ OJ--demand he give you half first. It's not all his money, since you're married--half of it is yours. So really only 25% is his--50% belongs to the IRS, 50% of his 50% is yours. Put your share in a CD or mutual fund, and don't let him touch it.

    Bookmark   March 28, 2008 at 12:42PM
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Chemocurl zn5b/6a Indiana

Have you ever known someone elderly just trying to exist on Soc Security with little or nothing to supplement it.

I have known one. A widow woman, trying to live on her one SS check with a very tiny pension (school cook for a few years).

She was forced to keep her house very cool in the winter. She had to apply for heat assistance. She had to carefully watch every cent she spent. She quilted some and sold them for a very little additional income. She put up stuff on halves...meaning if someone provided the fruit or veggies, she processed them for half of the finished product. It was a lot of work, but it provided her with some healthy eating.

Thank goodness she was spry and spunky. With a lot of effort and determination, she was able to keep her home, the utilities on, and eat fairly well.


    Bookmark   March 29, 2008 at 3:05PM
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Dolcemia, are you saving for your retirement?

    Bookmark   March 31, 2008 at 3:38PM
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Sorry I haven't responded to your postings everyone. I have been so overwhelmed with this "Windfall" as my DH likes to call it.

To quickly answer some of your questions. We are both 45, and I do realize the severity of what he is doing. But it is a little hard to talk to a wall.

Unfortunately, I am ashamed to admit that most of what EVERYONE is saying to me is another language. I have heard of the term IRA and ROTH, but Ira is a man's name and Roth is a second hand store in our town. I know I should be more educated about my money, but I did not grow up with it, and never expected to have any.

We both have retirement plans with a previous employer we worked for, and DH's is quite large, and I have one with my current company; I work for our county. My company doubles my plan if I retire with 20 years of service, and I have 2 years to go. I know if anything happens to my DH before me, I will be taken care of. But you made me realize that if anything happens to us before he dies, I personally will not be able to survive.
DH's current plans for the money has also changed. He has agreed to put 30% into a CD to keep and pay on the taxes when they come due. He also agreed not to spend it on junk. We will be paying off 2 loans, freeing up $150.00 a month in our budget. What he doesn't know is that I will be taking that $150 that is freed up and squirling it away in a separate saving account.

I also have an appointment to talk to a financial advisor after he gets his package, and WILL be getting some knowledge.

Thank you for also making us aware that DH cannot collect unemployment while receiving a severance pay. No one told us that. (and he didn't believe me until he checked for himself).

His company is paying our insurance while he receives his severance, giving me enough time to enroll in my company's insurance plan. I will only be without insurance for 18 days.

Finally, I am so thankful that there are people out there like all of you, who are willing to give advice, FREE advise, to someone like me. You have all helped in so many different ways to solve one huge problem. Thank You all!

If you ever need advise on crafts... lol, don't hesitate to write. That is one thing I know a little somethin' about.

Thanks again


    Bookmark   April 9, 2008 at 10:49PM
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Chemocurl zn5b/6a Indiana

Well, Dolce, it sounds like it has all worked out really well.

It is good to know that there are indeed retirement plans that will be available once you retire.

I also have an appointment to talk to a financial adviser after he gets his package, and WILL be getting some knowledge.
Good for you! Maybe then Ira won't be just a man's name and Roth a thrift store...LMAO.

We will be paying off 2 loans, freeing up $150.00 a month in our budget. What he doesn't know is that I will be taking that $150 that is freed up and squirling it away in a separate saving account.
Good for you! It was money that was not available for spending b4, so it won't even be missed.

Thank you for also making us aware that DH cannot collect unemployment while receiving a severance pay. No one told us that. (and he didn't believe me until he checked for himself).
Wow... I just mentioned that on a hunch that he might not receive unemployment for a while. I'm glad he checked it out.

Stop back by anytime, and fill us in on what you learn at the adviser. If you have further questions or need explanations, we can likely help.


    Bookmark   April 9, 2008 at 11:36PM
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What's going to happen if your husband doesn't get another job?

    Bookmark   April 10, 2008 at 12:31PM
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"I work for our county. My company doubles my plan if I retire with 20 years of service, and I have 2 years to go. I know if anything happens to my DH before me, I will be taken care of."

Will the 'windfall' pay the bills until you retire?

Glad to hear you will have your own retirement pension to rely on regardless of what other decisions you and DH make.

    Bookmark   April 10, 2008 at 1:16PM
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We're all happy to hear that you and your DH have come to a practical decision on his situation. You are right, this is just the beginning of your financial education, but that's okay, we all started there too. Best of luck going forward!

    Bookmark   April 11, 2008 at 7:12PM
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Hi again dolcemia,

I am pleased that your husband has a retirement plan ... and that you have one, as well.

At what age can you begin to draw on them?

Usually they are set up to begin at age 65 ... can you choose to begin drawing before that?

For example, in Canada, the Federal pension, to which we all contribute, which began over 40 years ago, intends to have us retire at 65, with full pension (if we made full rate of contributions ... which you don't, if you earn anything near minimum wage, meaning that low income hurts, even into retirement).

If I choose to retire earlier, they won't allow me to do it before age 60, and for each 2 months that I retire before age 65, they reduce my pension by 1% ... which means 6% per year, and if I chose to retire at age 60, there would be a 30% reduction.

On the other hand, if I choose not to retire until after age 65, I get a bonus of 1% for each 2 months extra that I work and contribute, 6% per year.

Is your pension set up so that as inflation continues over the years, does the amount of your pension increase, as well? If there is a provision for it to increase due to inflation, it's almost certain that it won't increase at the same rate as the rate of inflation, but less ... which means that it won't cover as many expenses as the years go by as it would earlier. They call that a pension being indexed for inflation.

Is your husband's pension indexed to inflation?

Do you owe money on credit cards, that you don't pay in full each month when the bill arrives?

Is it/are they mainline cards, or cards issued by stores?

Do you know what rate of interest that you pay on those unpaid balances?

Usually on mainline cards it's about 15 - 18% annual rate.

Usually on store-issued cards it's up around 25 - 28% annual rate.

If I loaned you $100. and said that you owed me $25. per year for the use of it, would you consider me some kind of rascal?

May I ask you a question ... have you heard the saying, "A penny saved is a penny earned"?

Do you believe it?

If you say that you agree, I'd like to disagree, in terms of much of the stuff that, when you buy, you might be able to save a dollar on the purchase.

When you consider most of the stuff that you buy ... when you prepare your income tax, can you deduct the price of it as you calculate the amount of tax that you owe?

For much of the goods that most of us buy ... the cost is not deductible. Which means that we have to buy it using money that we've already paid income tax on, i.e., after-tax money.

Let's suppose that you could save $1.00 on a purchase that you make.

If you're in 25% marginal tax rate (i.e. the rate of tax that you pay on your top dollar of income), that means that you have to earn $1.33 before-tax, then pay 33 cents tax, leaving yu with $1.00 in hand to go out to buy that item.

So .. if you save $1.00 on the cost of the purchse ... you've saved $1.333 of extra earnings, right?

Plus... if you pay that 28% on a store-issued credit card, most of the things that you bought when using it were not tax-deductible, right?

Which means that, if you're in 25% income tax rate, you have to earn $36.00 pre-tax income, then pay the 25%, or $9.00 income tax, leaving you with $27.00 ... oh,oh ... not quite enough to pay that $28.00 owing.


When you buy a car (or do you lease) do you pay cash for it, or do you finance it?

If finance, do you shop around to find the best rate of interest and terms? Are you a member of a credit union, or are there some in your area? Sometimes they offer lower rates, or better terms, than the usual market offers.

Do you try to pay the loan off as soon as possible?

I recommend that.

Be sure to pay off the loan quite a while before you need to replace the car.

Then keep putting away that amount of money (or nearly as much) each month, building a fund to enable you to make a far larger down payment on the next car. It would be best if you can pay the full cost in cash ... that lets you put the amount of interest into your own pocket that you'd been paying earlier to a lender.

I like keeping my money in my jeans over paying others to borrow theirs.

Do you have an emergency fund?

That is, if you had no family income for 3 months (or, even better, 6 months ... or, better yet, a year) would you have anough money available that you would still be able to live fairly comfortably?

It's important to have such an emergency fund, in case unexpected expenses crop up ... including if we get laid off from work, especially if permanently, as your husbnad is dealing with at the moment.

I recommend learning how money works - it's an interesting hobby.

And, know what? It pays well ... very well. As I said earlier .. pay off your store-issued credit card balances fully when they come in each month ... save yourself 35%. And that saving is ... guaranteed. Where else can you earn 35% on your money ... guaranteed!?!?

Good wishes for making your money work harder for you than for the other fellers!

ole joyful

    Bookmark   April 12, 2008 at 12:56PM
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