How can I avoid taxes on my pension if I retire at age 55 ?

Question

What kind of rollover or plan can I use so I can avoid paying taxes on my 30 year pension when I retire at age 55 ? I have been told I will have to pay penalties and taxes regardless if I am not 591/2 yrs old. Is this correct ? THanks

Answer 1

First of all, it is not likely that you will ever completely avoid taxes on your retirement plan money. In your case, what is going to happen if you WITHDRAW all or part of the money before age 59 and 1/2, you will face taxes as well as a 10% withdrawal penalty. The thing to avoid here is that penalty. There are other reasons to wait until you are older to withdraw retirement money (ie, theoretically when you are older and have less income you will pay less tax on retirement withdrawals), but this is something you should discuss and plan out with an accountant.

When you retire at the age of 55, you will need to decide where you want to open an account to hold your retirement funds. If you have a bank (ie, Bank of America, Chase, Wachovia) or a brokerage house (ie, all banks mentioned previously have brokerage/investments, or Fidelity, Charles Schwab, etc) this would be the place to start.

Tell your financial advisor/representative at your chosen institution that you need to do a "roll-over" of your retirement plan. You will have to open a retirement account (most likely a Traditional IRA, not a Roth because you will have to pay back taxes and depending on the value of your account that could get ugly) with your new institution, and they will have you fill out some forms instructing your former employer to "roll over" your funds to the new institution. There is very little work on your part (if done correctly). You might have to sign something from your former employer authorizing them to do the rollover. IMPORTANT: Instruct your employer to transfer the funds directly to the new bank. You don't want to touch a check, the funds, nothing. Just roll it over to the new bank please, thank you! If you take the funds out yourself, you will not be taxed or penalized immediately, but if you don't get those funds into a qualified retirement account within 60 days of withdrawal, bam, the IRS gotcha!

Just remember:

1. Taxes only happen when you withdraw money from the account
2. Putting the money in a new retirement account at a bank or brokerage house does not constitute a withdraw as long as you do it quickly and correctly, so you won't be charged taxes if you do this
3. Penalties apply when you withdraw before the age minimum, which sounds like 59 adn 1/2 with your type of account

So when you retire, ROLL OVER those funds into an IRA/Retirement Account, and do yourself a favor sooner rather than later and invest in a consultation with a certified public accountant, and do some long-term planning with them!

Answer 2

No it isn't correct.

First I assume when you say pension you are talking a 401K or an IRA. If you really mean a pension you can start taking payments now and you will pay normal income tax - no penalties.

If you are talking 401K or IRA you can do two things.

Any investment firm such as Fidelity can take care of this for you. There is no fee if you put the money into their funds.

1. Roll it into a rollover IRA. Any investment company can do it for you. You pay no taxes and the earnings are tax free until you start withdrawing money. You must start withdrawals by the year you turn 70 and 1/2.

2. If you need the money you can start withdrawing it now if you take in in equal installments geared to run out at the end of your life expectancy based on IRS actuarial tables. You pay ordinary income tax on the withdrawals. No penalty or interest. You can't change the amount of withdrawals until you are over 59 1/2 years old.

Answer 3

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Answer 4

If you are speaking of IRA, yes you must be 59 1/2 to begin withdrawls. Yes there are penalties and taxes before that age., except for emergencies.
After 59 1/2 even then withdrawls will be included in your total income and taxed accordingly. Remember IRA contributions were not taxed. The withdrawls will be calculated based on your expected mortality. You do not have to make withdrawls at 59 /1/2, I don't know the absolute required age. I think it changed. Around 70 1/2 I think.

Answer 5

believe that applies to 401d and IRA's for penalties. Taxes on gains yes you will pay. Regular pension regular taxes