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Merlo
Merlo, Accountant
Category: Tax
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Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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wife fired from job, getting pension money soon, we will need

Customer Question

wife fired from job, getting pension money soon, we will need to use money, is their a 10% penalty for early use of money and what kind of tax will have to be paid on money? or are there certain circumstances where there is no penalty? age 51 money amount 187,500
Submitted: 5 years ago.
Category: Tax
Expert:  Merlo replied 5 years ago.

Hello terry,

 

I assume you are talking about withdrawing from a 401k plan. Unfortunately there is no exception to the penalty for withdrawals made prior to age 59-1/2.

 

Even when taking a hardship withdrawal from a 401k plan, the penalty still applies for anyone under the age of 59-1/2.

 

Withdrawals from a 401k plan will be taxed at your ordinary income tax rates. Since it is so close to the end of the year, you may want to consider taking some of the money this year and taking the rest of it in 2009. At least that way it will help keep your top tax bracket down somewhat and you should end up owing less tax.

 

If a 401k plan is not what you were referring to, please let me know the type of plan involved here.

 

If this was helpful please press the Accept button. Positive feedback is also appreciated.

 

Thank you.

 

Expert:  Merlo replied 5 years ago.

Hello again terry,

 

There is one option you may want to consider if the funds from this 401k plan are not all needed at one time.

 

Your wife can roll over the 401k funds in to an IRA plan. Once that is done she can apply for a 72t plan with the IRS, which is basically a plan to withdraw the funds in that account in equal payments over her expected lifetime. This plan does avoid the 10% penalty. Once a 72t plan is put into place, the income stream must continue for a minimum of 5 years or until she reaches age 59-1/2 (whichever comes last). So if you do not need the funds all at once then this may be an option for you.

 

I am giving you a link to a website which explains the 72t plan and how it works.

 

If this was helpful please press the Accept button. Positive feedback is also appreciated.

 

Thank you.

 

http://www.moneymanagment.info/72T.htm

 

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