Expert: Allen - 7/28/2008

Question
QUESTION: I am a recently divorced mom to 3 kids. My ex works for Mayo Clinic and has for the entire marraige. I was awarded 1/2 his pension. I am perm disabled. My only income is SSI child support and $500 alimony. I have been living in San Diego during divorce proceedings to be close to my parents but now I need to move to phoenix where cost of living is more reasonable.Since I cannot work I need to withdraw my part of the pension to pay off some medical bills and to purchase a home for me and the children. How much taxes will be taken out of the pension money if I take it out for those 2 needs.Is there a form I need to fill out? I have tried to talk to Mayo and they say that it is a mandatory 20%. But other places I have looked have said that I would be exempt from the 20% tax. Since I am financially challenged I thought I should ask an expert.
thanks
susanna

ANSWER: Sorry to hear about your problems.

The 20% that is withheld is a legal requirement. They must withhold 20%. The actual tax you pay may be more than 20% or less than 20%. It depends on your actual taxable income for the year. If 20% is not enough, you will have to pay an additional amount when you you file your tax return. If it's too much, you'll get a refund.

Regarding the actual tax - you will have to pay regular federal income tax. You will also have to pay state income tax to either California or Arizona. Finally, most distributions made before age 59 1/2 are subject to a 10% excise tax. When the distribution is for certain expenses, the 10% tax does not apply. You should check with Mayo to see if the distribution will qualify for exemption and if it does, what papers you have to provide them.

Good luck.

---------- FOLLOW-UP ----------

QUESTION: what if I need all of the money for the down or I cannot afforf the payment?
susanna

Answer
Using the money for a down payment on a home will not qualify for the exception to the 10% excise tax.

However, I reread your question and saw that you were permantly disabled. Payment on account of disability will qualify for an exception to the 10% excise tax. You will still have to pay income tax and Mayo will withhold 20% as an estimate of the federal tax and possibly an additional amount for state income tax.

It is important that the 1099R that Mayo sends you next January be coded to show that the distribution was on account of disability. Otherwise the IRS will ask why you are not paying this extra tax.