Take Another Approach

Stephanie wants to get Dave's take on using a pension to pay off a mortgage. Dave wants her to be aware of something that will come with the pension if she takes the lump sum, then gives her another option.

QUESTION: Stephanie in Ohio wants to get Dave’s take on using a pension to pay off a mortgage. They owe $40,000 on the home, and if they cash out the pension, they would receive $44,000. Dave wants her to be aware of something that will come with the pension if she takes the lump sum, then gives her another option.

ANSWER: It won’t be a penalty, but it will be taxable. The 20% is withholding. It will be taxed at his rate. You’ve got a $10,000 tax bill.

If he’ll roll the pension into an IRA, he doesn’t have any taxes on it. I would take the lump sum pension, roll it to an IRA, and have no taxes. Let it grow tax deferred until you need it. Then you’ve got a 401(k) and this new IRA that we’re forming as his retirement nest egg. He’s got $50,000 in checking. He could write a check today, be debt-free on the house, and still have $10,000 in checking. Set that aside as the emergency fund of three to six months of expenses. Then we’ve got a good emergency fund, we’re completely debt-free, and it sounds like we’ve got about $100,000 in nest egg.

No sense giving the government 25% of this today. If he needs it, he can always do that. There’s no penalty on it. He can always pull it out and pay the taxes off the IRA. I would just get with your Endorsed Local Provider (ELP) or whoever does your mutual funds work. Go to our ELP for investing at daveramsey.com if you don’t have somebody, and they can help you roll that directly to an IRA. There’s not a 20% withholding. It’s not needed. They can do a direct transfer on that pension without paying any taxes or without having any taxes withheld. Let’s keep the government’s hands off that money for right now. Lord only knows where they’re going to take us from here, but for now, let’s keep their hands off of it.