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I am leaving a government job where we had no 401(K) one year before I vest in my retirement plan. My new job will pay $20,000+ yearly. I have a shameful $9,000 in debt excluding my student loans. I should have $25,000 in my retirement plan. I estimate that I will receive some $3,400 from my deferred comp & reimbursement from paid vacation and sick leave time. I was planning to rollover my retirement into an IRA. My plan is to take the $3,400 and pay down my $9,000 because I want to keep my retirement money. Is this the smartest option? Despite the tax penalties should I pay off the whole amount with my retirement? My new job has no retirement plan....I've already been looking into a new retirement plan with a brokerage. What do you think?

I guess I'm a bit confused on what the first few sentences mean. You say your current job had no 401(k) plan. You are leaving one year before you vest in your retirement plan. Then you say you have $25,000 in your retirement plan. I'm going to assume that this means you just missed out on a pension, and that there's some type of you-can't-contribute-to-it-but-employer-does retirement fund that you can roll into an IRA.

On that part of the plan, I'd agree with you. Make certain you understand the implications of this from all angles. What tax hit will you take? Is there some amount of this plan that you lose due to not being vested? Or is this taken into account in the $25,000 figure?

One question: are you certain rolling this money into an IRA is the best choice? Check with the administrator of the retirement plan from which you'll receive the $25,000. Will they continue contributions for you? How does it obtain its growth? It's possible (though I doubt it) that you could be better off leaving the money alone. I'm simply recommending that you understand what you might be giving up by removing the money.

All that aside, please don't tap these funds to pay off the $9,000 in debt that you have! You want to keep that nest egg intact and growing. You'll get all of the debt paid off even without doing so.

Now, on to the $3,400 you expect to receive. First, I'd keep a portion of this in a savings or money market account for emergencies only -- let's say $1,000. For the remainder, try to allocate the money to pay off in full as many debts as you can. (You didn't mention if the $9,000 is all one debt or many smaller -- this assumes the latter, obviously). My thinking is that by paying off as many smaller debts as possible, you are freeing up the money that used to go to minimum payments on those for attacking the remaining debts. Of those not paid in full with this lump sum, focus those extra dollars towards the highest interest rate debt remaining. Keep rolling those dollars and paid-off-former-minimums rolling into the next debt. Before you know it, all of them will be gone.

Finally, since your new employer doesn't have a retirement plan, consider opening a Roth IRA at a brokerage house as you mentioned. Personally, I'd recommend getting the $9,000 paid off first and then going for the Roth.

Hope this helps.
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