Pension lump sum and turning 55.

[EastWest Gal]

I worked for a hospital system a few years back for just long enough to get vested. I have been offered the opportunity to take a lump sum. It's about 65k, 56k after taxes. I could really use the cash next so I won't have to sell assets for 1-2 years.

Everything I read says there is a 10% penalty if I take the lump sum before I turn 55. The decision deadline is June 16 and my 55th birthday is mid September. Not one source I found said "the year you turn 55". Does anyone know if I'll need to pay the penalty?

 

[golfnut]

"the year you turn 55" usually refers only to 401ks. You may want to call your former employer to get confirmation. In all likelihood, you will need to pay the 10% withdrawl penalty.

 

[EastWest Gal]

Why can't they wait they wait 3 months or until next year? I'm penalized $6000 because of my birthday. I'll call.

 

[pb4uski]

Be careful on the taxes. There could be a big difference between what they withhold from your lump sum and what you owe once you complete your return as a result of that additional income. Also make sure to consider any state and local taxes that additional income might cause in addition to federal income taxes.

You may be better off rolling the lump sum into an IRA selling the taxable account assets for your cash needs, especially if the have long term capital gains that will be taxed at less than ordinary rates.

As golfnut explained the 55 thing would not apply to this.

 

[pb4uski]

Why can't they wait they wait 3 months or until next year? I'm penalized $6000 because of my birthday. I'll call.

The only way you avoid the penalty under the exception you are thinkg of is if you leave the employer after turning age 55. Since you left before age 55 that exception would not apply.

So if you cash it out now, you'll owe taxes (see my prior post) plus the 10% penalty. You're probably better off selling the assets you prefer not to sell.

 

[gerntz]

What's the lump sum alternative? If monthly payments, can you get a loan & pay it off with those payments?

 

[EastWest Gal]

Even with the penalty, I'm taking the lump sum. Divided the annual pension by the lump sum, it's about 7% so it's a wash. Besides, I have one more semester of college to pay for my son, and that covers it plus our 30th anniversary celebration in Alaska this summer, with some left over. It feels like I won a prize. It saves dipping into the dividends in my Schwab account for about a year.

And yes, there is a penalty.

 

[pb4uski]

Seems that you had your mind made up from the beginning.

I don't get how paying 38% of your lump sum in taxes (25% federal, 3% PA state and 10% early withdrawal penalty) beats not dipping into the dividends in our Schwab account, but have a good time with your windfall.

 

[EastWest Gal]

You're right about that. 59-1/2 was correct. Waiting years for <$300/month seems silly. I'm going to look at the rollover option. I can put it in my IRA and take out money from elsewhere for some coming up expenses. Just found out the group is phasing out my position since I was planning to retire and I might go to 0.3 time as early as August. Yippee!!!

 

[jclarksnakes]

Waiting years to get <$300 a month for the rest of your life does not seem silly to me.