Expert: Allen - 8/19/2009

Question
I am 56 years old and I am thinking of taking a pension, lump sum from a prior employer to pay down on my mortgage and refinance it for lower monthly payments. I am still working and have a pension with my present employer and a 401-k.I know I have to pay the 20% for taxes but do I have to pay the 10% penalty. The prior pension was from 8 years ago. I call the IRS twice and got two different answers from two different people. Also any other advice on taking the  pension?

Answer
Unfortunately, the payment is subject to the 10% excise tax penalty. There are a few exceptions; however, none of them apply in your situation. If you want to look at the rules go to Section   72(t) of the Internal Revenue Code.

Some other things to be aware of:
1. The 20% figure is the amount that will be withheld for federal income tax. The actual tax paid may be more or less than this amount. It depends on your other income.
2. If you live in a state that has a state income tax, you will also have to pay state income tax on the amount you receive.

I recommend not taking this distribution before you reach age 59 1/2.