Accounting, Payroll & Pension Issues/Early withdrawal from pension or 401k

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Expert: - 9/1/2009


Question
I am 47, live in Texas and recently lost my job. I see know options other than to take an early withdrawal or cash out from either my pension or 401k. Is cashing out one better than the other? Thanks - Ken

Answer
That really depends on the type of pension- they can vary widely.  But, if you held the job where you have your pension for a long time, it would most likely be better for you to take an early withdrawal from the 401(k) instead.  The reason is, pensions (by which I assume you mean a defined benefit plan, as opposed to a defined contribution plan like a 401(k)) involve complex formulas that take into account how old you are when you start receiving benefits.  Again, I can't say with certainty without knowing the details of your specific plan, but you'd probably be better off waiting to collect that one.

If, on the other hand, you did not work there for a lengthy period, then I'd go ahead and withdraw from the pension rather than the 401(k).

If you do decide to withdraw from the 401(k) Plan, you will have to pay both the regular income tax on the total withdrawal as well as an excise tax of 10% as a penalty.  But, as they say, "you gotta do what you gotta do."  Sometimes, unfortunately, we don't have the option of waiting.

Best of luck to you.

Accounting, Payroll & Pension Issues

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Vanessa D. Powell, CPA

Expertise

I am experienced with general bookkeeping, payroll, journal entries, adjusting entries, all types of pension accounting, compliance issues, ERISA, benefit plan auditing, financial statements, payroll tax, Form 5500, retirement planning, and related issues. Please no homework questions. Only US accounting, please.

Experience

I am a CPA in Southern CA. I audit not-for-profit organizations, corporations, and employee benefit plans for the large accounting firm I work for, as well as performing other attest services, planning, and tax services.

Organizations
California Society of CPAs, American Institute of Certified Public Accountants

Education/Credentials
Licensed CPA in the state of CA. Graduated summa cum laude from Colorado Technical University. In order to keep my license, I take 80 hours of CPE every two years. Much of it in the field of accounting, auditing, and employee benefit plans.

Awards and Honors
Graduated summa cum laude (with highest honor).

Past/Present Clients
I have clients from all over the world, in nearly every industry. Most of my audit clients are employee benefit plans and not-for-profit entities. Most of my compilation engagements are manufacturing, agriculture, and construction.

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