1. I had a large windfall a few years back but without any of the issues you have in terms of whether to take it or not.

    We decided to blow half on an awesome trip to Paris and invest the rest. Having made that money work for me we’re now much better off than we would have been but still have great memories of France for the rest of our lives.

    May not help you in your dilemma but if you do take the lump it’s an idea 🙂

    • That does help! If it was more than $3,000 (for both of us!), maybe we would go halfsies. But I think we will just invest this time. It puts us that much closer to maxing out our Roths, so maybe we’ll have some fun money in our future 🙂

  2. With this timing, it’s clearly for holiday shopping…
    Or not. Stick to your guns and roll it to your IRAs like you had planned. Be strong!

    It does stink that the state has had your money interest-free for so long, but better late than never. If I could roll my social security contributions to an IRA that would be a happy, happy day.

    • Great question! I can’t roll it into a simple IRA (per the TRS gobbledegook rules). I might do a 403(b) if I don’t have to do annuities. The annuity options offered by my district are so bloated with fees, I wouldn’t be doing myself any favors.

  3. I’d invest it for retirement, for sure. Unless like you said you need to pay off some high-interest debt, which it doesn’t sound like you have.

    I’m not surprised most people are taking it in a lump sum and spending it like it’s “free money.” Just like the tax refund time. I can’t believe part of our economy is built around spending tax refunds on stuff we don’t need! As if this money just materialized out of a nowhere. Whatever you do, I’m sure with your financial understanding, you’ll make an informed choice 🙂

    • You’re right, Kalie! This is just like tax time, isn’t it?!

      Although I am totally guilty of always getting a bit of a refund. We put ours in our Roths, though 😉

  4. At your age, I would probably invest it. At my age, I’d take the tax hit and put money down on a rental property mortgage. We are doing that now to pay them off to increase our cash flow for my early retirement. We will also be in a higher tax bracket in retirement (sounds crazy to most people…) – so we are also looking to take money out of our retirement accounts over the next few years (and take a penalty) to pay down rental mortgages. It’s all about where you are – and your long-term goals.

    • Oooh, that’s a good caveat. Maybe all of my coworkers have income properties 😉 It sounds like Roth for sure. Thanks, Vicki!

      And that is totally my fear. If my pension holds out (this isn’t a promising glimpse into my pension future, I’m afraid), we will definitely make more money in retirement. Something to think about.

  5. Man, that’s rough about the pension system! But $3,000 is a nice little windfall. 🙂

    But jeez, a 20% tax penalty is hefty. I agree that the lump sum only makes sense if you’re paying off somehting with an interest rate higher than that 20%–and if so, that really sucks to begin with! I think most people like lump sums because it’s a big chunk of money right now.

    I honestly can’t think of a scenario where taking the lump sum would be helpful unless you were in DIRE financial straits and were at risk of losing your home/job/car, etc.

    If it were me, I would just dump it into my Roth.

    • Thanks for the push! That was my first instinct, but I started to wonder if maybe there was something I’m missing. Honestly, I think a lot of people are looking at it as Christmas present money or winter break travel money. I don’t want to assume, but that’s what I fear with the lump sums.

  6. Are you sure this money would count towards your Roth contributions for this year? Isn’t it a rollover since it’s already tax-deferred money? Rollovers don’t count towards contribution limits. If so, I would consider rolling it into a Rollover IRA instead of a Roth IRA so that you don’t have to pay the taxes this year.

    I don’t think the lump sum ever makes sense. Those people probably want to use it for the Christmas presents they never budgeted for throughout the year ?

    • Sadly, Roth or 403(b) are my only options per the state nonsense. And the 403(b) options are murky – I definitely don’t want an annuity with the few providers my district approves.

  7. Oooh! Congrats on the extra cash! I’m with everyone else here on loading up the Roth. 20% is a huge hit and not worth it, in my opinion. Like Emily mentions, you can always withdraw your contributions from the Roth (after 5 years) without taxes/penalty.

    Our tax returns are earmarked for loading up the IRAs and, though it’s never enough to max them, it certainly helps!

  8. Is it a penalty or just withholding? Why would they penalize your for canceling their own program? 20% withholding sounds like lazy accounting… They just want to get the money out the door. Then you can settle up at Tax Time.

    Put it in a Roth.

    • It’s lazy accounting for sure. And they absolutely want the money out the door.

      It goes well with my interest that they collected and aren’t adding in.

  9. What Kate said, I assume the 20% is just a withholding aka a tax payment. I’m pretty sure I had 20% withheld when I over-contributed to a 401k and got a refund the next year.

    Take the lump and put it towards your Roth IRA at your convenience. Easy peasy.

  10. No you’re not missing anything about the lump sum. So ignore your coworkers and keep this for your retirement. If you’re able to roll it over directly into a traditional IRA without the withholding, I’d do that, otherwise, go for the Roth.

    • Dave

      GARY @SUPER SAVINGS TIPS is on the right track.

      Penny wrote that one of her two options was: “Take a lump sum payment, paying a 20% federal income tax withholding.”

      A “lump sum payment” from a qualified retirement plan (e.g. a 403(b) plan or a 401(k) plan) is taxable as ordinary income AND generally, if you are not age 59 1/2, it is ALSO subject to a 10% premature distribution tax.

      Don’t confuse/conflate the 20% mandatory federal income tax withholding requirement with the 10% premature penalty and the reality that the $3,000 lump sum distribution is taxable as ordinary income.

      You and your spouse may be in the 15% marginal income tax bracket or the 25% marginal income tax bracket. If you take the three grand, it’s taxable as ordinary income (all $3,000 (even though you’ll only get a check for $2,400)).

      To me, it’s a financial no brainer for EVERYONE getting this money — request/direct that the entire amount be directly transferred to a Rollover IRA at Vanguard. Direct transfers (roll overs) to an IRA are not taxable as income (and aren’t subject to the 20% mandatory withhold so the entire $3k is invested).

      One would have to be financially disparate and/or incredibly naive to take the cash given the taxes and penalties involved.

      Understanding the income tax consequences is critical in making intelligent decisions.

      • Thanks so much for this insight, Dave! We only have the option of putting it into a Roth IRA. We cannot use simple IRAs. The restrictions are really convoluted. I actually also learned since I wrote this that we cannot put them into our 403(b)s due to the way our contracts with the 403(b) vendors are written. Thankfully/embarrassingly, I don’t have a 403(b) yet, so it’s definitely headed to my Roth. Sadly, I am the only person in my building who has commented (that I’ve heard!) who isn’t taking a lump sum 🙁

        • Dave

          Penny –

          Please see this IRS Rollover Chart: https://www.irs.gov/pub/irs-tege/rollover_chart.pdf

          Is your 403(b) pre-tax or is it a Designated Roth Account? My guess is that it’s pre-tax.

          Notice from the IRS chart that while a pre-tax 403(b) CAN BE rolled over to a Roth IRA, the amount is included in income (and generally would be subject to the 10 premature penalty tax and the 20% withholding requirements (the actual amount of federal and state income tax will be determined by your Taxable Income)).

          Employers SHOULD be making it easy to avoid penalties and taxes with this money — the exact opposite of what you’re experiencing. More’s the pity.

          The more “sane” approach that the state of Illinois or your union or whomever is sponsoring your 403(b) plan should be providing is to not only allow but actively encourage you to roll the pre-tax 403(b) to a Traditional IRA. Why aren’t they?

          Forcing individuals to incur the 10% penalty tax as well as state and federal income tax (which is what will happen if you roll to a Roth) when these costs can be avoided is something that I would challenge the state of Illinois (or your union or whomever is your plan sponsor) on. Why are you being prohibited from rolling to a Traditional IRA?

          As an aside, generally Roth (IRAs, 401(k)s, and 403(b)s) “works” if the taxpayer will be in a higher marginal income tax bracket when they take the money out (generally at retirement) than they were when they made the Roth contribution. Typically, for two-income families, their current marginal income tax bracket is higher now than it will be in retirement. AND…given the 10% penalty tax, it’s almost a sure thing that “doing a Roth” with this “windfall” will probably never make “tax sense” because your marginal rate now (including the penalty) will probably be higher than your marginal tax bracket will be during retirement.

          The legislators (and governors) in Illinois have for many, many years made an absolute hash of the state employee retirement programs. It is bizarre, however, even for them to require that the only way you can keep this money invested for retirement is via a Roth IRA because of the current income tax consequences. Or keep it in the plan at zero interest.

          I’d be very curious to see what sort of disclosures were provided to you and your colleagues on this.

          By the way, it’s very, very common for individuals who terminate service (with vested 403(b) or 401(k) money) to do what your colleagues are doing…take the cash, it’s “free money”. Who cares if I “net” $2000 (after penalty, fed and state taxes)? It’s $2,000 more than I otherwise would have. Today.

          Who cares?

          Your future self at age 65 or 70. It’s unlikely anything your colleagues “do” with this windfall today will be remembered when they are 65 years old.

  11. I would take the lump sum if you were able to turn it into something that would make you more than the initial investment. For example, if you were saving for a rental property or some other appreciating, money generating asset and you just needed the last $2,400 (or $4,800, since you and your husband each would get the $3,000?) And that asset would make you $5,000 (or more, just making up numbers at this point) a year. But if you don’t have anything like that, then I’d vote for rolling it over into the most advantageous, least fee account that they will let you.

    • Sadly, no rental property on the horizon. Maybe after we both get our next raises from our Masters in two years. Sigh. That is an excellent point, though, Jax! Hopefully many of my coworkers are “topping up” something.

  12. Jover

    Just to be a contrarian, take the hit and throw it at the mortgage. It won’t necessarily make the most sense financially, but you’ll pay a little less interest on every payment for the remainder of your mortgage term. Continue using budgeted money as you normally would, but use this “extra” or “unexpected” money towards another budget goal.

    • I love it! Normally, I am all about that extra mortgage payoff. But I suppose I’m losing that bit of tax credit, then, on top of the 20% taxes. Hmmm. Still definitely worth considering!

      The more I read, though, the more nervous I get. There’s this mysterious language next to details about the 20% tax withholding. It says early withdrawal penalties may also apply. But there’s no further explanation! UGH! I’m going to have to pick up the phone and wait on hold forever.

  13. If there are early withdrawal penalties then you’ll want to keep it tax advantaged. I can’t iamgine they would let you use a Roth but not a Traditional.

    SIMPLE is a self employed product so it doesn’t make sense why they would reference that all.

  14. Louisa

    Perhaps this was always evident to others but I just recently learned it: When you have to be on hold a long time, put your phone on speaker (even if the music is bad) so you can walk a few feet away from it and feel like your life is still worthwhile as you do something while you wait.

    Good luck picking the best option for yourself!

  15. Here is a good post on your situation:


    For what it’s worth, here’s what I’d do. I’d roll it to my traditional Vanguard IRA and then I’d hammer my Roth IRA. Actually, I’m so cheap that my 2016 contributions would be to another traditional Vanguard IRA. You know me, gotta keep those taxes at bay. Does your district offer any decent 403b options? Only fee-bloated variable annuity monstrosities? If not, that’s amazing that in 2016 entire districts in Illinois are at the mercy of variable annuity salesmen masquerading as objective financial advisors.

    Good luck,

    • I think I can open one through Fidelity. But it’s hard to tell what vehicles the rollover supports, especially when they mention annuities by name. Thanks for the food for thought, Ed.

    • I think I would drop dead if we ever got the news that we could manage our pensions. Tears of joy, man. But yes, this $3,000 looks amazing knowing that neither my husband and I are really expecting to ever see a dime from the state. I hope we’re incredibly wrong. But it’s bad here.

  16. Jacq

    Can you put it in the 403(b) for the initial roll over and then move it to an actual Rollover IRA in a little while to get away from the fees? Otherwise, I’d also vote Roth. Even if it goes into the Roth post 20%, it’s a bonus.
    I had a situation where someone said, oh if you had extra money what would you do with it? My answer was increase my 401k % & then fund my Roth & then once I max my Roth, I’ll put money into a taxable account for retirement. Because it was a sensible answer, not buy a new car, or spend frivolously, the person was willing to help, and I was able to increase the 401k %. 🙂
    I save my money too so that I can take fun trips sometimes, but I want that to come from regular saving so I’m not relying on bonus, or tax refunds or odd windfalls.
    Best of luck with your decision! Hope the hold wasn’t too long. I always try for ‘chat with a representative’ first, sometimes if it’s overly complicated they can then give you a direct line to call.

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