Expert: Allen - 4/9/2007

Question
If I am laid off from my current job the company will cut a check for the entire amount of my pension (not my 401k).  I know that normally you are hit pretty hard with taxes on something like this, however, I would like to take a couple of  years to go back to school and use the pension to live on.  Is there a way to do this, could it be considered a hardship as we would not be able to survive on my husbands income alone?

Answer
When you receive a disribution that is not rolled over to an IRA, it is subject to federal and state income taxes. In most cases the tax is the same as the amount that would be paid on salary.

If you receive the money before you reach age 59 1/2, in most instances it is subject to a 10% federal excise tax. There are a few exceptions. Unfortunately using the money  to pay living expenses is not one of the exceptions.

There is one possible way around the excise tax (but not the income tax). You can have the money rolled over to an IRA. You can then have the money distributed from the IRA to pay "qualified higher education expenses" The rules are  complex and if you use this exception I would look at the Internal Revenue Code Section 72(t)(2)(E) and Section 72(t)(7)to make certain the distribution meets the requirement.