Expert: Allen - 3/11/2010

Question
Hello. I am 27 years old and last March I was laid off.  On March 9th I received a letter from my previous employer saying I had $1348.26 in a pension. I am going to cash it in and it says that federal tax will deduct 269.65.  Then it says state income tax nothing withheld.  When I go to change that it gives me the option to put something in. How do I know how much to put in there?  Before they send me my check will they take out the $269.65?  Will I have to pay taxes on it again when I file for my 2010 taxes?  If I don't withhold any state tax now will they make me pay on it in 2010 when I file my taxes?  

Thanks for your help, sorry for so many questions!

Answer
You can either take the amount in your account in a check to you or you can roll it over to an IRA.

If you decide to take it in cash you have to pay federal income tax, state income tax (if you live in a state which has an income tax) and a 10% federal excise tax on money withdrawn before you reach age 59 1/2. The amount withdrawn for federal income tax is only an estimate. You can have them take out more if you want. The exact amount of tax will be based on what is known as your marginal tax bracket. (I do not know what your rate is.) If someone prepares your taxes, he or she may know. If you have too little withheld, you will have to pay the difference next year when you file your taxes. If you have too much withheld, you will get a refund when you file your taxes. The same goes for state taxes. If you do not have anything withheld, you will have to pay when you file youir tax return. You should speak to a friend or relative who is more knowledgeable about your tax situation.

You can avoid taxes now if you roll over to an IRA. You can set up an IRA at any financial institution. You can go to a local bank and ask them for the paperwork. Or you can contact a mutual fund company like Fidelity or Vanguard or T. Rowe POrice and ask them for the paperwork. If you are setting up an IRA, you will have to fill out the forms provided by your employer with the name of the financial institution and the account number. Taxes will only be due when you take the money out of the IRA.