Question on Pension Payout from Former Job

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kilroy027
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Question on Pension Payout from Former Job

Post by kilroy027 » Thu May 03, 2018 4:48 pm

I have a pension from my former employer that I left last year. Total payout is about $38,000. Normally I would just roll it over my Vanguard IRA where I rolled over my 401K. However, I am also saving up a house downpayment that will hopefully be used in the next couple of years (I'm currently single and since I'm somewhat open to moving I'd prefer to rent in the short term), of which I have about $25,000 saved.

If I elect the payout, I will have the 21% federal withholding, the 10% penalty, and the 5.75% NC state income tax impact, so I would probably end up with about $24,000 that I can put towards a house downpayment, which would get me pretty close. As additional background, I will make about $105,000 this year assuming I achieve all of my performance bonus targets for the year.

Is my gut instinct to avoid the tax/penalty and rollover the pension to an IRA the right call, or should I approach it as a good boost to my house downpayment fund? Are there are other tax implications that I am not considering, or is there another option that I should consider as well? Thank you for your help.

Silk McCue
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Re: Question on Pension Payout from Former Job

Post by Silk McCue » Thu May 03, 2018 9:17 pm

Welcome to the forum!

Your gut instinct is correct. These funds are far too important for your long term financial future. I recommend you roll them into an IRA. This site is full of good practical investing advice that won’t cost you a dime and that will save you a tremendous amount of money over time. Please take advantage of it.

Owning a home is great but building a strong financial future is even more crucial. You can do both, just don’t sacrifice the head start you have in your investments.

Cheers

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Pajamas
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Re: Question on Pension Payout from Former Job

Post by Pajamas » Thu May 03, 2018 9:25 pm

kilroy027 wrote:
Thu May 03, 2018 4:48 pm
Is my gut instinct to avoid the tax/penalty and rollover the pension to an IRA the right call,
Yes, roll it over and keep that money working for you tax-deferred. You should be able to set aside enough for a down payment over a few years with your salary without using that. You plan to keep renting for a couple of years, anyway. You could end up with the same $24k by saving $1k a month for two years. If you don't think you can do that easily while still maxing out retirement contributions at work, look at ways to cut expenses.

hawkfan55
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Re: Question on Pension Payout from Former Job

Post by hawkfan55 » Thu May 03, 2018 9:31 pm

Best to do a rollover IRA and avoid penalties and taxes. This $38k will be worth SIGNIFICANTLY more when you retire. Listen to your gut... you are right!
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soccerrules
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Re: Question on Pension Payout from Former Job

Post by soccerrules » Fri May 04, 2018 11:23 am

go with your gut.
Roll it over - don't think twice about it.
Your 60 yr old self will thank you someday.
Don't let your outflow exceed your income or your upkeep will be your downfall.

hambone
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Re: Question on Pension Payout from Former Job

Post by hambone » Thu May 10, 2018 4:18 pm

Definitely roll it over. With your salary you should be able to save that money in 1-2 years.

MathIsMyWayr
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Re: Question on Pension Payout from Former Job

Post by MathIsMyWayr » Thu May 10, 2018 10:39 pm

Since I started taking advantage of tax advantaged savings quite late in life, I know how valuable that space is. Please try to put as much as possible into IRA while still available. Once the opportunity is gone, it is gone forever. Yes, close eyes and roll it over to IRA.

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Watty
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Re: Question on Pension Payout from Former Job

Post by Watty » Thu May 10, 2018 10:48 pm

kilroy027 wrote:
Thu May 03, 2018 4:48 pm
If I elect the payout, I will have the 21% federal withholding, the 10% penalty, and the 5.75% NC state income tax impact, so I would probably end up with about $24,000 that I can put towards a house downpayment, which would get me pretty close. As additional background,
If you do not have a full 20% down payment then the alternative would be to pay PMI for a few years until you can get it removed. I didn't try to figure out the numbers but I suspect that would be a lot less expensive.

Eagle33
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Re: Question on Pension Payout from Former Job

Post by Eagle33 » Fri May 11, 2018 3:04 am

Roll it over!
About 6 years ago my old company offered me a lump sum early payout to of a small pension that I would have coming once I reach 65. I took the lump sum that was similar in size to your amount and it is now more than twice the amount when first invested. I plan on keeping it invested.
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.

Bacchus01
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Re: Question on Pension Payout from Former Job

Post by Bacchus01 » Fri May 11, 2018 7:19 am

Please roll it over

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Flobes
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Re: Question on Pension Payout from Former Job

Post by Flobes » Fri May 11, 2018 10:16 am

Agree with the crowd above: enjoy the precious tax-deferred space.

That said, as you're consideration is using the money for a future home purchase, you might want to know that if you qualify as a "first-time home buyer" (per the govt definition), you can withdraw up to $10,000 from your IRA to use as a down payment (or to help build a home) without having to pay the 10% early withdrawal penalty. However, you'll still have to pay regular income tax on the withdrawal.

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