What is the penalty for cashing out state pension contributions?

Question

I'm currently employed by the state of Massachusetts but have just been offered a job in the private sector.

I have been contributing to the state pension fund for eight years but will not be vested (that requires 10 years in the system) so my contributions will be returned to me.

I'm told that you can either roll that money into a 401k or take a cash payout but that if you take the cash you pay a substantial penalty in addition to applicable taxes.

Does anyone know how much of a penalty you have to pay? Or for that matter, at what rate it gets taxed? I would ask HR but don't want to tip them off to the fact that I might be leaving.

Answer 1

HR wouldn't know much about taxes anyway.

If your plan is a defined contribution plan then taking an early distribution is taxed a ordinary income plus a 10% penalty tax plus whatever MA does to you.

The 10 year vesting rule doesn't sound right though. Under ERISA, pension plans must vest in 5 years or less. If your state pension plan is different it might be worth sticking it out until you are fully vested depending upon how much money you're talking about. But whatever you do, roll it over into an IRA to avoid a massive tax bill.

Answer 2

They withhold an computerized 20% for taxes; this quantity is fastened regardless of your very own own tax fee. the ten% penalty is utilized once you record your taxes. reckoning on how lots tax you owe it may be paid with the withholding that became taken already. using your occasion. while you're taking a distribution of $50,000 in January of 08, they are going to withhold 20% of it or $10,000. Then in January of 09 you will get a 1099-R exhibiting the distribution and witholding quantities. You teach the distribution quantity on the 1040 separate out of your earnings wages and strategies. even with the undeniable fact that, the withholding purely gets further to the different federal withholding you have in 08 (withholding is withholding). Your taxes would be calculated based upon the entire earnings much less your deductions. At that element you will upload on your 10% ($5,000) penalty to get the entire tax. If quantity you had withheld nevertheless exceeds the full tax then you certainly get a reimbursement. If no longer, you will owe extra money. complicated to declare how lots which would be by way of fact I dont understand your earnings nor your deduction quantities. base line is multiply your 401k stability by using eighty% and that's how lots money handy you could have. yet word that come tax time you could owe extra! and btw the guideline of 72t isn't a good option for you in view which you're purely 40 4 and the stability is paid based upon your existence expectancy...won't supply you the money you prefer. verify how lots it is going to take to purchase decrease back the provider credit and multiply that quantity by using a million.2. in the experience that your 401k stability is bigger then you certainly could roll over the better 401k. this would help decrease the effects.