I have just relocated to another state and I have to take my state retirement from Georgia out. The good news is that it’s more than I anticipated (since I used TIAA-CREF I vested immediately, meaning that even though I only worked for the state of GA for 3.5 years I take their matching funds as well) but the bad news is that unless I roll it over or buy a house within 120 days I have to pay about 30% in penalties (20% to IRS and 10% to CREF), though I should still clear about 1/3 of my annual income. (Unfortunately I am not ready to buy a house yet, which I hate because I’ll be losing about $5,000 that I could use in the downpayment.)
Even if I take the IRS/early withdrawal loss, I should clear an amount of about 1/3 of my annual income, which is more cash money than I’ve ever had. Now, while this sounds like a nice nest-egg, I have some outstanding medical debts as well as some little niggling debts that I need to pay off (and hopefully rehabilitate my credit in the meanwhile) and I owe my mother some money (about $2,000) that I want to pay off, and I’ll need to trade cars in a few months (I lease and my lease is almost up), and I need a couple of things for around the house that I don’t feel are frivolous (a washing machine being the biggest item). All this should leave around half of it, give or take a little, which is basically just a little less than what I myself paid to the state of Georgia retirement system.
Now, I seem to have gotten all the need for self-denial out of my system back during my incarnation as Gandhi (an avatar I can’t discuss at length due to my pending litigation for likeness infringement with Sir Richard Attenborough and the makers of WaterMaid rice). I know myself well enough to know that if I leave whatever residue is leftover after penalties and expenses then I’ll whittle it down- nothing major, just a special edition Dr. Zaius action figure rerelease like the one I so desperately wanted but didn’t get when I was in third grade here and a Sunday in the Park with George as sung by the cast of Star Trek CD here until it’s severely reduced or gone. In addition, I’ve never really gained money managing skills for the simple reason that I’ve never had any money to manage.
So my question: What’s the best way to use this money so that it does the following:
1- provides me with a nest egg that I can use to finally have some savings
2- is available for withdrawal should I ever have an emergency and absolutely have to have cash (i.e. I have to go across country to check on a sick friend or relative, etc.)
3- is enough of a pain in the ass to withdraw that I won’t be tempted to take it out for a weekend trip to The Burl Ives IMAX Retrospective in beautiful downtown Mackinaw (i.e. it’s protected from myself)
4- will hopefully stand the best chance of earning interest at a better rate than $1.04 per decade
Also, if anybody knows any way that MIGHT let me not have to pay the IRS and early withdrawal penalties, please suggest it. (Again: I’m not going to do anything just because somebody I only know through a message board said it might be a good idea- I’ll check with a qualified expert first- but I’m trying to get a sense of the options that are out there to investigate; I’ve never had more than about three-four weeks pay in my savings before so I don’t won’t to blow this.)
To clarify the first part…if you are under age 59.5 and choose not to roll over the distribution to another qualified arrangement (401(k), IRA, etc), the custodian (TIAA-CREF??) with withhold 20% for federal income tax. This is just federal withholding though. That is not the amount you’ll owe in taxes. The entire amount of the distribution will be included in your taxable income for the year. The 20% withholding may or may not cover what you’ll owe the IRS. Also, the 10% excise tax on early withdrawal (if it applies) will not be taken out by TIAA-CREF. It’ll be up to you to come up with that when you file your taxes for the year.
With regard to the second part…Roll the distribution to an IRA. It’s the only way to avoid having the distribution taxed and subjecting yourself to the early withdrawal penalty. By choosing an IRA over your new employer’s plan (if one exists) you still give yourself the flexibilty to take money out for emergency situations like housing or healthcare costs. The IRA gives you the advange of possibly avoiding the early withdrawal excise tax if you do need to dip into the account. If that does come up, do your homework first though. Only some withdrawals from IRAs are exepmt from the excise tax. IIRC, medical expenses must above a certain percent of your AGI to qualify. These exemptions don’t apply in 401(k) and other employer sponsored plans.
There is another way. Roll the amount over into an Annutity. Usually you can do that. It’d give you a tiny monthly income- for the rest of your life. I don’t know the amount of your windfall, nor your age, but my WAG is that it’d be $100/mo.
What is then fun is that later you* could* then blow that $$ on that “special edition Dr. Zaius action figure” during the years when you had an otherwise adequate income. Until then, you can use the $$ to help pay off your debts, etc.
Roll the entire amount into a new IRA account. You will defer the taxes until you make withdraws in your retirement years, satisfying condition 1. It also satisfies conditions 2 and 3, per the previous posters (although I don’t think visiting a sick friend is on the list of emergencies, but maybe it is). How you invest the money will determine if condition 4 will be satisfied.
It is not. Oddly enough, thanks to the Burl Ives Taxation and Fiscal Responsibilty Act of 1998 (BITFRA), Mackinaw has seen a sharp rise in retirees attending their film festival.