Early Lump-Sum Withdrawal from a Company Pension Plan?
Sunday, July 30, 2006
By: Tyler Malin
NCE recognizes that employees are more frequently changes positions in the modern workplace. Often this means that employees accrue pension benefits and that upon the change of job, they have a decision to make about what to do with these pension benefits. Often employees, especially younger employees who can benefit from reinvesting this money in higher performing investments, take a lump sum payment for their pension benefits and re-invest that money in an IRA. Employees should avoid taxes and unnecessary headaches by setting up an IRA and instructing their former employers to rollover any pension money into the IRA.
If the employer instead cuts you a check you will find that 20% of the pension moneys will be missing. This is because your employer is automatically withholding this 20% as taxes on an early distribution. You must rollover this money, plus the missing 20%, into your IRA account within 60 days of receiving your check. If the account is under funded, or funded on the 61st day you will pay the income tax and a 10 percent early distribution penalty. You will receive a credit for the 20% that you contributed to make up for the employer deducted 20% on your next year’s income tax.
Sound like a hassle? Often employers will have no problem rolling the money into your IRA directly, you just have to ask and be specific. If there is a mistake and a check is sent make sure to track the 60 day deadline for funding your IRA. Make sure you deposit the entire amount plus the 20% to make up your employer’s deduction and make it your first priority to avoid the unnecessary tax. Keep written records of all financial transactions and important dates for your tax records. |
