Expert: Allen - 10/3/2004

Question
I am a 54 year old construction electrician. The work in my Union Jurisdiction has been so bad of late that I am thinking of retiring early just so I have some income to live on. I can return to the field if times get better. My problem is that the defined contribution plan monthly benefit is extremely low and I need to supplement it with my 401K plan. The fund administrator told me that I could withdraw my 401K money without the 10% penalty if I take the money in a series of equal contributions over a period less than my life expectancy. I am aware that the monthly payments will have 20% taken out for taxes. Is this correct or will I have to pay the penalty?
                                Thank You
                                Sandy Gallo

Answer
Sorry to hear that you have to tap your retirement funds.
The plan administrator has given you good information. You avoid the 10% penalty tax if distributions are taken over either your life expectancy or the life expectancy of you and your wife. The IRS has specified several methods for the calculation of the amount that has to be withdrawn each year and you must take the same amount out each year until after you reach age 59 1/2. Also the plan administrator has to be willing to make the calculation for you and you have to actually retire in order to receive any money from the 401k account.
The 20% withheld for taxes is the amount that the law requires. Your actual federal income taxes may be more or less depending on your taxable income. In addition, you'll also have to pay state income tax. So you probably should try not to spend the entire amount that is paid to you.
Good luck.