Expert: Allen - 10/27/2008

Question
I will be retiring next month.  I know my pension will be taxed, but can you tell me how the taxes are figured.  What should I claim as my exemption?  Today I claim 0.  I don't want to end up paying taxes at the end of next year. I am
56 yrs old , divorced with no dependents.  The pension is
from my company, not my 401K.  I'm planning on leaving my 401K with my company and not touch it until 59 1/2..is that a good idea?

Answer
In most instances any money you receive from a pension or 401k will be taxed as ordinary income. This means it will be taxed the same way that salary is taxed. How much to withhold is dependent on your situation - for example, how much other income you receive. I therefore can not give you a good answerr on how much should be withheld. You may want to start with 0 dependents for now to play it safe.

If you don't need the 401k money, I recommend not touching it for as long as possible. Amounts received will be taxed as ordinary income. In addition, under certain circumstances amounts received before age 59 1/2 may be subject to an extra 10% excise tax. In addition, as long as the money is in the 401k account, it will continue to grow with investment income.

Enjoy your retirement. I'm envious.