Expert: Shirley McAllister, CPP, PHR - 1/27/2009

Question
My husbands' company is offering an early retirement in which he would receive a year in salary. He wants to take his 401K and pension in a lump sum, pay everything off and start over. We know there would be a 30% tax (10% plus 20%)on the 401K and pension because of his age (51) and wondered if these lump sums are figured as ordinary income on a tax return? Should we figure another 30% for state tax on income? Our income for 2009 would be extremely high due to the distributions but for 2010 would be closer to 40K. Any thoughts would be appreciated.

Answer
You are correct, early withdrawal penalty, state and federal tax on the funds withdrawn from the 401k.  Both lump sums are figured as income. I do not think the state will be 30%, more like 15%, depends on your state.

If you take 30% plus state evan at 15% it is almost half. You have to make a decision if it is worth 1/2 just for the taxes and penalty. That is not even counting what it adds to your income and if the 30% will be sufficient to cover the income taxes due.

Depending on what is in there that could be a considerable amount in tax and penalties as opposed to rolling it over into an IRA and waiting for 8 years until the taxes are less.

That 45 or 50 % could pay a lot of bills off at a later time.

You have to be 59 1/2 for them not to be penalized.

At 51 you will not have time to rebuild the 401K so you are taking out the retirement that you would have had there to retire on. We all know that Social Security not only does not support you, but it may not be there in a few years.

Shirley