Expert: Arthur Naman - 7/10/2010

Question
My employer is dissolving - I have enough in my pension and profit sharing funds to put a substantial down payment on a house. If I withdraw those funds to put a down payment on a house what is the limit I can take without paying taxes and penalties? I would prefer to take the entire amount for the purchase but think I can only use $10,000 without a penalty but will still have to pay taxes. What are my alternatives?

Answer
Generally, an employee cannot withdraw from his or her pension pension plan without incurring penalties. The penalties are normally 10% plus the distribution is included in your income. this is if the distribution is before the employee turns 59 1/2 age. There is no limit below which no penalty is incurred; it starts at $1.00. Thus if you withdraw $10,000 you may owe a penalty of $1,000 plus the entire $10,000 would be included in your income.

You need to ask for and review a "summary plan description" which should show how the penalty is calculated if at all.

Normally under the circumstances where an employer is dissolving, the employee does a roll-over into an IRA or other employer plan (if a new employer is secured by the employee).

The money in a pension plan is supposed to stay there until retirement

With that said, I am aware of an exception to the early withdrawal penalty if purchasing a home.  Please note:  The home-buying exception has the following additional criteria: you did not own a home in the previous two-years, and only $10,0000 of the retirement distribution qualifies to avoid the tax penalty.

You really need to talk to an expert (not a volunteer, but someone in your geographical area who works in this aspect of tax law) to assist you. In addition, please discuss this with whoever will be preparing your income tax return for the year in question