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Hi and welcome to Just Answer! I'm happy to help with your tax questions. Feel free to interject at any time if you need clarification.
Since you will be 59.5 when you make the distribution, you won't be subject to the 10% early withdrawal penalty. The money you withdraw from your 401k will be taxable at your ordinary income tax rate. So, if you are in the 25% tax bracket, it will be taxed at 25%.
It is pretty standard to withhold 20% of taxes on 401k withdrawals, so that should cover a good portion of your taxes unless you are in a very high tax bracket.
You cannot split the taxes on the withdrawal over 2 years, but you do not need to pay the taxes immediately. As long as you pay at least 100% of last year's tax liability or 90% of this years tax liability in your withholdings, you will not be penalized for paying in April 2012.
OK thanks. Does a tax sheltered fixed 10 yr annuity make sense in this economic environment?