Expert: Allen - 5/9/2005

Question
I am asking this for a 65 year old male who has no computer.  He has retired and will be withdrawing approx. 15,000 from his profit sharing and 401K to pay off his home.  He retired as of 3/30/05 and gross wages from 1/05 - 3/31/05 was approx $6600.00 and draws $1007 per month from Social Security.  He was told by a financial person that if he drew out the 15,000 that he would be under a tax shelter and wouldn't be taxed heavily on the $15,000.  This gentleman didn't understand and has asked me to help him find out if he withdraws this money from his 401K will he be taxed a high percentage for the withdrawal.  Any help you can give him will be appreciated.
Thank you.
Brenda Robbins

Answer
He may be eligible for something referred to as five year averaging which could reduce the tax that would be paid on the $15000 if it was withdrawn as a lump sum.
Since he is already in a low tax bracket, his tax bracket may not be that high and this may not help. You would have to run his tax return three ways - with the lump sum withdrawal using 5 year averaging, without the lump sum withdrawal not using 5 year averaging and by simply withdrawing a small amount each year rather than a lump sum.
Since he has a relatively low income, he or you may be able to go to the IRS and get free assistance.
Good luck to both of you.