I've been politely arguing with a couple we know, and would like to get your input. Let me know if I'm off or not.

He has been in education his entire career, and will be fully vested in TRS. She taught for about 15 years before moving to a successful career in real estate.

She wants to cash out her TRS. I say it's a bad idea. She says according to her calculations she would only get about $650/mo if she left TRS alone. I say, that's an income stream, and while not a lot, it's something. It's a couple of used car payments she otherwise wouldn't get.

She says she can cash out a lump sum and pay whatever the penalty is, something like 30 percent, and they can use it to pay off debt. I say, keep the retirement and try to pay off debt through other means.

Finally, I asked about insurance, since I have family members who retired on TRS and used the insurance. They think Medicare will take care of things after 65, and aren't too worried about it.

So, what say ye retirement gurus and those who are familiar with TRS? Am I more in the right, or is she? TIA.

Depends on how far she is from retirement. When you aren't paying in, the money she has in her trs account is basically just sitting there not making anything. If she's anywhere near retirement she should take the trs money as you have suggested. A guaranteed income stream in retirement would be very hard for me to pass up. I'm guessing she won't be able to take it until she is 65 though. 65 + 15 years of service = the rule of 80

tamutaylor12 said:

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Depends on how far she is from retirement. When you aren't paying in, the money she has in her trs account is basically just sitting there not making anything. If she's anywhere near retirement she should take the trs money as you have suggested. A guaranteed income stream in retirement would be very hard for me to pass up. I'm guessing she won't be able to take it until she is 65 though. 65 + 15 years of service = the rule of 80

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Yeah I think a future income stream trumps the immediate desire to pay off debt, plus the tax hit on a cash payout is pretty steep, if I'm not mistaken.

tamutaylor12 said:

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Depends on how far she is from retirement.

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This is the big one for me. I have 10 years in and I'm in my 30s. Might leave TRS soon and will for sure pull my money out and use it for a down payment on a nice rental house. Even with the penalty, this will destroy any piddly returns TRS might be able to give me half a lifetime from now. If I were 50s-60s, I wouldn't touch it though.

I would also say it largely depends on what kind of debt she is going to pay off. Home loan at 4% would be a pretty terrible idea while a credit card at 18% that is also saddling your credit might make sense.

This might be a dumb question: can she take TRS money out and roll into an IRA?

My wife was a state employee (CPS) and we took out some of the money she had earned and put it into her now 401(k). No penalty and no losses. Earns more now than it was in the fund.

Could you do something like that with TRS cash?

~egon

Yes, she can do this. She can submit a withdrawal request and then has 90 days to roll it into an IRA to avoid the penalty.

That's what I was going to say.

My wife has money in TRS, but we live in CO now. She's going to pull it out and buy years in her current pension, though it could very well go into an IRA. There is no penalty to do either.

techno-ag said:

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I've been politely arguing with a couple we know, and would like to get your input. Let me know if I'm off or not.

He has been in education his entire career, and will be fully vested in TRS. She taught for about 15 years before moving to a successful career in real estate.

She wants to cash out her TRS. I say it's a bad idea. She says according to her calculations she would only get about $650/mo if she left TRS alone. I say, that's an income stream, and while not a lot, it's something. It's a couple of used car payments she otherwise wouldn't get.

She says she can cash out a lump sum and pay whatever the penalty is, something like 30 percent, and they can use it to pay off debt. I say, keep the retirement and try to pay off debt through other means.

Finally, I asked about insurance, since I have family members who retired on TRS and used the insurance. They think Medicare will take care of things after 65, and aren't too worried about it.

So, what say ye retirement gurus and those who are familiar with TRS? Am I more in the right, or is she? TIA.

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depends how she puts it to work otherwise...I ducked out of education after 11 years...the payout for me later was silly...once I'd be old enough to collect on the payout vs what I could do with it as an active full time options trader (which is the profession I took on as of June) those next 20 years alone, clearly made my choice easy in putting that money to work for me (even if I was still being a self directed trader on the side it'd have been better)

I forgot the numbers/percentages I crunched when weighing this "dilema" for myself but it wasn't even close given my consistent returns even with the tax cornholing figured in (which is ridiculous by the way, for the privilege of getting your money back from a bunch of monkey money investors)

Comanche_Ag said:

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Yes, she can do this. She can submit a withdrawal request and then has 90 days to roll it into an IRA to avoid the penalty.

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Makes no difference if it's a self directed IRA right? That's an interesting option. Can she split it up, pay tax on part and pay debt while rolling the rest into an IRA? I may suggest that if it's possible. Best of both worlds.

techno-ag said:

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Comanche_Ag said:

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Yes, she can do this. She can submit a withdrawal request and then has 90 days to roll it into an IRA to avoid the penalty.

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Makes no difference if it's a self directed IRA right? That's an interesting option. Can she split it up, pay tax on part and pay debt while rolling the rest into an IRA? I may suggest that if it's possible. Best of both worlds.

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The only issue I would see with taking ANY of the money is (and this is my read, but not professional opinion) is that there is no benefit, unless you are talking $100k+ in monies and large debts that are highly materially impacting your life.

The 10% add'l penalty fee, plus the current taxes, start dramatically cutting into your money you end up with to pay off debts. For example, she take the $50k she has (made up) and does a 50/50 roll/cash out.

$25,000 starting, assume 25% tax, plus another 10% leaves her with $16,875 (if I did my math right). $8,125 sent to Uncle Sam is a bit much to settle some debts. Unless she was losing her car and had no money to buy another and still had student loans plus child support, I would think that using current cash to pay off debts and leave retirement money to compound is the better option. I could see stalling some retirement investments currently to accelerate debt payments as a better option, since you are getting a 'boost' from TRS.

But that's me. If they have that much of an issue with debt, send them to DR. Not that I believe him; just his method works for a large segment.

~egon

Thanks good advice.

CS78 said:

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tamutaylor12 said:

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Depends on how far she is from retirement.

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This is the big one for me. I have 10 years in and I'm in my 30s. Might leave TRS soon and will for sure pull my money out and use it for a down payment on a nice rental house. Even with the penalty, this will destroy any piddly returns TRS might be able to give me half a lifetime from now. If I were 50s-60s, I wouldn't touch it though.

I would also say it largely depends on what kind of debt she is going to pay off. Home loan at 4% would be a pretty terrible idea while a credit card at 18% that is also saddling your credit might make sense.

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Strange, I could have written this myself. Same age and years of service, etc.

Comanche_Ag said:

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Yes, she can do this. She can submit a withdrawal request and then has 90 days to roll it into an IRA to avoid the penalty.

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Has 60 days to do the rollover to avoid both the income tax and the penalty for being under 56 1/2.

For me, I would use other income to pay off debt rather than use retirement funds.

And one more thing, (not to beat a dead horse)...

If they were to take out monies from TRS, the normal withholding is 20%. So if they do that, they keep a bit more in their pocket, but come April 21st next year, they could be in for a surprise in that any refund they were banking on is now gone or the 'small' payment they thought they would have to make is now 4 figures.

Not that this has happened to me (it hasn't). But I have had the situation where you knew you would pay some, but then it turns from $200 bucks to $4,000 due to the market's doing better than you expected and not a lot of deductions....


~egon

TRS is a direct benefit pension as opposed to a direct contribution plan (401k). Never, never, never withdrawal from a direct benefit annuity like TRS. Ex: 15 yrs service with salary average of $48k x 2.3 (TRS multiplier) equals roughly 16k per year. Divided by 12 months that is roughly $1300 every month... For the rest of your life.

Archie86 said:

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TRS is a direct benefit pension as opposed to a direct contribution plan (401k). Never, never, never withdrawal from a direct benefit annuity like TRS. Ex: 15 yrs service with salary average of $48k x 2.3 (TRS multiplier) equals roughly 16k per year. Divided by 12 months that is roughly $1300 every month... For the rest of your life.

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See this is good info. Many thanks. I think they are not old enough to get really interested in investigating everything fully. Consequently the only thing they're looking at is her lump sum.

May want to consider how the GPO (Government Pension Offset) will effect SS income. I believe SS benefits will still be offset, even with lump sum of TRS.

Agre with above post, everything is moot until you know how it will react with ss payments.