Relatively new reader, first time poster, so apologies if similar topics have been discussed before....
I recently changed jobs from local government with a pension to an out of system non-profit. I was in my gov't position for 4 years, and I'm not fully vested in the pension plan but I do have around $7,200 of my own contributions sitting there and I'm in a bind about what to do with the balance. The way I see it, I have basically 3 options:
Option 1
Withdraw it all in a lump sum. If I do this, I'll take a hit of 20% upfront in federal taxes, a 10% excise tax penalty for early withdrawal when I file this year's taxes, and state income taxes next year (about 4.5%). So in all, my $7,200 would be a lump sum payment of about $4,716. We don't carry a credit card balance and we're just about to pay off our car (I know I know, we financed it but that was before I became a mustachian). So I could put it toward our mortgage (remaining balance of $68,000 at 3.5% interest) or invest it into a dividend or index fund (although I'm a bit worried the market is overvalued at the moment and I wouldn't be getting the best deal, dollar cost speaking).
Option 2
Rollover into an IRA tax free. The problem here is that my new employer only offers a SIMPLE IRA and my understanding of the SIMPLE IRA is that there are a lot of restrictions on rollovers and can only be done from/to another SIMPLE IRA. That would mean I'd need to open up a new IRA, either Roth or Traditional (I suppose? I haven't really explored this option yet).
Option 3
Do nothing. I leave my money sitting there where the state guarantees to earn a flat 4% per year indefinitely. After I turn 55 (currently I'm 29) I could withdraw it without the 10% penalty. Running the amount through the Motley Fool investment calculator though and estimating 2% inflation, my investment would be worth all of $8,873 in 26 years. And I'd still be on the hook for the federal and state taxes if I understand it correctly.
Unless there's a better argument or something I'm missing about Option 3, I'm essentially taking that one off the table. Personally, I'm partial to putting it into a dividend fund, expecting that the market over the next 25+ years will outperform the 3.5% I'd save on my mortgage or the 4% I'd earn leaving it where it is, and hopefully would more than make up for the tax hit and penalty. I lean away from the rollover option simply because it "locks up" my money for many years and we have aspirations of buying rental or commercial properties down the road.
Many thanks in advance for your thoughts!
brandino29
Aspiring mustachian