About five years ago, I was part of a public-school teachers retirement system in another state. The account is currently inactive, but Ive got about $77,000 sitting there drawing 2 percent interest. My husband and I have about $30,000 in debt, I’m less than 59 years old, and we make around $80,000 a year. Should we leave the money alone, roll it over into an IRA, or just take it out, take the hit in penalties, and pay off the debt?
—Jamie in Nashville, Tenn.
Dave Says: If you pull the money out, you’ll get hit with your tax rate which is around 30 percent plus a 10 percent penalty. That means you’ll lose about 40 percent of your money. I think that answers your question on just taking out the money. You never want to give the government any more of your cash than is absolutely necessary!
If I were you, Id roll it over into an IRA. That way, you’ll avoid all those penalties and get much better than a 2 percent return. Make sure you do a direct transfer rollover, Jamie. This means you’ll need to contact a good mutual fund broker, and they’ll send the paperwork, plus a letter or transfer form, to whomever is running the retirement account. Then, they’ll send your money directly into the IRA. They’ll call it a withdrawal if they send you the money to put it into an IRA, and that means they’ll withhold 20 percent, knowing that you’ll be taxed. You don’t want that, either! Why put 80 percent into the IRA when you can dump the whole thing in there?
You’ll want to diversify, too. So, make sure you spread the money evenly across these four types of mutual funds: growth, growth and income, aggressive growth and international.