I am considering cashing out my retirement plan from the Public Employees' Retirement System (PERS). It is approximately $35,000 and I am 54 years old. I am aware of the state and federal taxes I will incur due to my not being 59 1/2 years old, but I need advice about rolling part of it over into an Individual Retirement Account (IRA). I need to use part of the money to pay bills, namely taxes due to the Internal Revenue Service (IRS). I would rather not establish an IRA with the banks because the interest seems rather low. I want to do this before 2010 is gone. Or should I wait in order to not have any added income on my income taxes?
FPA member James R. Johnson, CFP®, of Lighthouse Financial Planning, offered the following advice:
“The first item is the debt to the IRS. While I am not an attorney or a Certified Public Accountant (CPA), I do know that you can negotiate with the IRS and that retirement accounts are generally exempted. So, the first thing you need to do is negotiate with them. Professional help would probably be a good idea.
“The next item is the PERS account. The PERS account could be a 401(k), a 457 deferred compensation plan or your contributions to the pension plan. If the PERS funds are from your pension plan, generally you are eligible for a retirement benefit after you are 50 years old. Also, if it is the pension money, it would be next to impossible to replace the retirement annuity you could get from PERS by investing $35,000 anywhere. It’s a very good deal.
“If the PERS money is in a 401(k) or 457 plan, you could take a distribution and rollover the part you don’t know for bills into an IRA. You may be able to take a partial distribution for just the amount you need and leave the rest there.
“If you do roll some into an IRA with a bank, the rates of return are low now. Here are two thoughts on that — the money in the bank will be safe and rate will not stay low forever.
“With all that, taking the money set aside for retirement is a bad idea and should be avoided if at all possible. Debts to the IRS can be negotiated to reduce the balance owed and/or a reasonable payment schedule can be arranged. That is your best course of action.”