Expert: Allen - 10/27/2006

Question
I thought there was a one-time no penalty withdrawal option allowed prior to age 59-1/2 on pension or 401k?  (I know I would still have to pay taxes for early withdrawal).
Thought I read that somewhere or maybe the law has changed since I read it.  
Also, if I rollover my pension to some kind of IRA account and take a monthly set amount, there is no 10% excise penalty but if I set up a money market and write checks out of it for my monthly expenses I have to pay a 10% excise tax each time I would write a check from it?  Is that what I'm understanding?  I know I'd lose money by doing this but wouldn't it be less hassle to just take my lump sum pension, pay the taxes and onetime excise penalty and get it over with?  (this is prior to being 59-1/2).
Thank you.

Answer
There has not been any recent change to the rules. There are certain exceptions to the 10% penalty but unless you satisfy the requirements, you will be subject the penalty on any distributions before 59 1/2.
Among the exceptions is a set withdrawal from an IRA which is based on your life expectancy or the joint life expectancy of you and your spouse. The amount must be calculated in accordance with rules established by the IRS and you must take the same amount out for either 5 years or until you reach age 59 1/2 (whichever is the longer period).
I would not take a lump sum and pay a penalty on the full amount. I would transfer to the money market account in an IRA and only take money out as needed. Unless your time is very valuable, you are paying a large penalty if you take it all out before 59 1/2.