Im taking an early withdrawell and closing out my pension at age 55 and they are keeping 20%.?

Question

someone told me to have them take an additional 10% to cover taxes so I wont have to do that in the coming year when I get the money.
I thought I had to pay the 20% penalty PLUS another 10% and THEN still pay regular income tax on the remaining 70%.
Is this correct ?
I dont wont to get stuck paying taxes at the end of next year because I didnt have enough taken out.
I get the money in January so it will pertain to the year 2008.
I was given advice that the 10% would be enough and I would have the 70% scotch free.
Somehow It sounds too good to be true.
Thanks for your answers.
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# 2 - If for some reason they wont take out that additional 10%, Could I go ahead and pay taxes on the check in January 2008 when I get it ? Thanks..

Answer 1

The distribution is taxed as ordinary income so the tax will depend upon your marginal rate. If your marginal rate is 25%, that's what you'll pay. The 10% penalty is on top of that.

When you take the distribution, 20% will be withheld. If you total tax including the penalty is more than that, you will have to pay that when you file. Actually, you should make an estimated payment (in addition to the 20% withheld) to ensure that you don't get hit with additional penalties and interest at filing time.

You can avoid the penalty if you arrange to take the distribution as a series of substantially equal payments over a period of 5 or more years. This may also reduce the tax burden since you won't be hit with a large income all at once that could easily bump up your tax rate.

Consult with a qualified tax advisor -- a CPA or EA, not a mule at one of the store-front tax prep mills -- or a certified financial planner BEFORE you take the distribution to make sure that you are fully prepared for any tax consequences and avoid any rude surprises at filing time.

Answer 2

Even if we know how much money you are taking out of the tax deferred plans in January 2008, we have no idea what the rest of your income for 2008 will be. We also don't know your filing status, number of dependents, deductions, etc.

100% of the money you cash out is taxable income to you. If you take out, say, $100,000, the plan administrators will send $20,000 to the IRS (10% for penalties and 10% for tax). But if you add $100,000 to your tax return, your tax bracket isn't 10%. It could easily be the 25%. If you made another $50,000 in wages, your tax bracket could be even higher. Sending another 10-15% in January might be a good idea, it might not or it might not be enough.

On the other hand, maybe you won't be working in 2008, maybe you've only got $15,000 in your accounts and just maybe the tax bracket would be 10% and the amount withheld would result in a refund.

Answer 3

They'll withhold 20% - that's just an estimate of what people owe on withdrawals. When you do your tax return, you calculate your tax based on the total income tax, plus a 10% penalty if you're under age 59-1/2, but then the amount withheld is entered as withholding along with any regular withholding on your wages, so it's subtracted back out of what you owe.

Answer 4

You will be losing 30% of the amount saved and you think that is a good deal? Then on top of that whatever income was earned above and beyond your contribution is subject to Federal and State income tax ? I would get a second opinion on how the 70 % will be taxed and make sure youunderstand the consequences.

Answer 5

In California, I took out my small amt. of pension money a number of yrs. ago; I had to pay them for the early withdrawal. Then, to boot, I had to 'pay' more on my inc. taxes because of that income! I hope that helps.

Answer 6

When you fill out the paperwork, it will tell you how much penalty they will be taking. It most cases it is 20% penalty and 10% tax.