Ok, so I’m 55 and want to get early payment started on a pension being held by a former employer. I’m still working this year but will retire and have no monthly salary in all of 2010. I can get a lump sum from the pension, or start monthly annuity payments. I need the income right away so leaving to sit is not an option. If i get a lump sum and don’t shelter it in an IRA , is that distribution subject to Fed income tax? Likewise, are the monthly payments if i select a lifetime annuity taxable?
If you elect the lump sum, then the amount minus your basis is taxable.
If you elect the annuity, then your basis is divided by a number that depends on your age. That amount per month is not taxable for several years. When the total amount that was not taxed equals your basis, then the remaining payments are fully taxable.
In either case, the total untaxed amount equals your basis. In either case, the total taxed amount equals the difference between the total of the payments minus your basis.
July 13th, 2009 at 9:09 pm
yes and yes.
pension income is taxable to the proportionate extent that you did not personally pay for it with after tax dollars.
References :
cpa
July 13th, 2009 at 9:55 pm
Most of the time you can begin distributions of equal portions based on your life expectancy from the retirement plan and not suffer any early withdrawal penalty. You would only pay ordinary income tax on the annual distribution. If you take a gross distribution and put it into an annuity to accomplish the same thing you pay a early distribution penalty and pay tax on the gross. You should check with your plan administrator to determine if you can start an early distribution or equal payment over time.
References :
July 13th, 2009 at 10:23 pm
If you elect the lump sum, then the amount minus your basis is taxable.
If you elect the annuity, then your basis is divided by a number that depends on your age. That amount per month is not taxable for several years. When the total amount that was not taxed equals your basis, then the remaining payments are fully taxable.
In either case, the total untaxed amount equals your basis. In either case, the total taxed amount equals the difference between the total of the payments minus your basis.
References :
July 13th, 2009 at 11:13 pm
You will have to pay income taxes plus the 10% penalty for early distribution,you have to be 591/2 not to pay the penalty-except for certain exceptions.
You can take a lump sum distribution,pay the taxes and penalties,spend what you need to and invest some in a ROTH IRA for you and your spouse,put some into a regular savings account for emergency use and open a money market CD or other savings investment.
Talk to a financial advisor about your options and the best way to go.
If you lost your job due to the economy or closing,you will not have to pay the penalty on the distribution – 55 is the minimum age allowed to do this for now.
References :