Expert: Allen - 5/11/2007

Question
I'm planning to leave my company for a new job opportunity.  Recently the pension at my current employer was canceled for anyone with less than 10 years on the job.  I have a balance of $22K and I am thinking about cashing out (20% tax, 10% early penalty) and using the money as a down payment on a house.  This will allow me to keep my cash in the bank for emergencies.  Is this a good idea?

Answer
If it were me, I wouldn't cash out. The tax amounts you quote are not quite correct. The 20% tax is the amount that is withheld from your payment. The actual tax will be a different amount. It depends on what is known as your marginal tax rate. This might be 15%, 25%, 28% or possible a higher amount. (Most individuals are in the 25% bracket.) In addition, if you live in a state that imposes a state income tax, you will also have to pay this.

You'll therefore only net approximately 40% of the $22,000 after all taxes are paid (either now or when you do your tax return next year).

I would suggest transferring to an IRA. If you need the money for an emergency you can withdraw it from the IRA. (Taxes will still be due when you withdraw the money.)