Expert: Allen - 5/2/2007

Question
I am well under 59 1/2 and about to leave a non-profit job in which I have a fully vested $14,000 in my 403b ($4k my investment, $10k theirs). I'd like to cash it out, as opposed to rolling it over into another plan. How much of a tax hit or penalty should I expect?

Based off what I've read, I know I'll take a 10% hit for early withdrawal and 20% more for federal taxes. What implications are there when I file my 2007 taxes? Should I put some aside money to cover potential IRS payments?

Answer
There are three taxes that you may have to pay:

1. Federal income tax. The rate may be more or less than 20%. The 20% figure is the minimum amount the trustee must withhold on any distribution that is not rolled over to an IRA. You can ask the trustee to withhold more. The actual rate depends on your personal marginal tax bracket. This is the rate of tax you would pay on any additional income received by you.

2. Federal excise tax. This is 10%. It is not automatically withheld. However, you can tell the trustee to withhold more than 20% from the distribution for federal taxes.

3. State income tax. The amount depends on where you live. It can be anything between 0% and 10%. Some states require the trustee to withhold a certain percentage. Others don't. In any event you may be able to tell the trustee to withhold something and send it to your state.

You may want to have enough withheld from your distribution to cover the taxes. You can also increase the withholding on your salary. In any event, since you may only receive 60% of your money after all taxes are paid, I would encourage you to have the trustee of the plan roll the money to an IRA account.