I am 56 years old and have $16,000 in an Union Annuity account. Though I am still a dues paying member I no longer work out of the hall. What is the tax penalty if I cash this fund out now? My pension adviser said it would be from 0 to 10%. There is hardship involved as I had to replace an automobile and it has put a serious dent in my finances and there is still some repair work needed on my house. The union funds office said the penalty was 20%.
Hello and thank you for using JustAnswer. The union hall may have their own penalty based on time and reason for withdrawal but for tax purposes, if you simply request that the funds be sent to you and not electronically transferred to another retirement account, such as an IRA, you will be issued a 1099R that shows the distribution and the penalty will be 10% if you are not 59 1/2 at the time of withdrawal. The hall will also be obligated to withhold 20% in taxes.
If you receive a lump-sum distribution from a qualified retirement plan or a qualified retirement annuity and the plan participant was born before January 2, 1936, you may be able to elect optional methods of figuring the tax on the distribution. These optional methods can be elected only once after 1986 for any eligible plan participant.
If the lump-sum distribution qualifies, you can elect to treat the portion of the payment attributable to your active participation in the plan using one of five options. (1) Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and the part from participation after 1973 as ordinary income. (2) Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and use the 10-year tax option to figure the tax on the part from participation after 1973 (if you qualify). (3) Use the 10-year tax option to figure the tax on the total taxable amount (if you qualify). (4) Roll over all or part of the distribution. No tax is currently due on the part rolled over. Report any part not rolled over as ordinary income. (5) Report the entire taxable part as ordinary income.If you do decide to take all the money out then you will have tax to pay but could possibly not the penalty which would be 10%. Hardships as you have discribed are not hardship reasons recognized by the IRS as reasons to avoid the 10% penalty. The union was probably advising you that they would withhold 20% in taxes at the time of the distribution. The 10% penalty, if it did apply, would be shown on your tax return.