Expert: Allen - 4/22/2008

Question
I have a government pension that I want to cash out to put a down payment on a new house. The problem is there is a 10% penalty and 20% tax that will be deducted. Is there any loopholes to get out of paying some or all of these fees?

Answer
There is no way to avoid the income tax. This is required when you receive a distribution from a pension plan. There may be a way to avoid the 10% penalty tax. The tax does not apply to money used for first home purposes. However, this is only the case if the withdrawal is made from an IRA NOT from a pension plan. If you have terminated employment, you can request that the plan administrator roll the money over to an IRA. You can then take the distribution from the IRA.

Regarding the 20%, that is what is withheld from your distribution. It is only an estimate. The actual tax will depend on your tax bracket. It may be less than 20%. Or it may be more. If you live in a state that has a state income tax, you will also have to pay state tax on the withdrawal.

For these reasons, if at all possible, do not take a distribution.