I have $88,000 in a pension plan with a previous employer. I am 54 years old. I need $10,000 to pay off credit card debt, but I believe my pension plan will not allow a loan. Can I roll-over most of it to an IRA or Roth IRA, but keep $10,000? What would the penalty be on the $10,000? Is it 20 percent tax plus an early withdrawal penalty?
The inquiry describes the assets as part of a previous employer’s pension plan. The first step is to assess whether the previous employer plan provides for a lump sum distribution. Most do, but if the plan is a defined benefit plan, the plan may not provide for a lump sum. So, the distribution provisions of the previous employer’s plan will dictate whether a lump sum payment may be received.
If a lump sum distribution is available, the money can be rolled over. If it is rolled over to a regular IRA account, the rollover is not taxable. If the rollover is made to a Roth IRA, the recipient will pay income tax at his or her rate on the year’s tax return for the full rollover to the Roth account (conversion from a tax deferred account to Roth account always triggers tax at the date of transfer to the Roth account).
If a rollover is available, is made to a regular IRA, and then $10,000 is withdrawn (or retained), a taxpayer under the age of 59 ½ pays tax at his or her ordinary income tax rate (not necessarily 20 percent, as the rate could be lower or higher) for the year plus a 10 percent penalty on early withdrawal.
If the money is able to be rolled over, and is rolled over to a Roth IRA account, the income tax, as noted above, is paid on the full distribution to the Roth IRA account. A further withdrawal of $10,000 from the Roth account is not taxed a second time because the tax has already been paid because of the rollover to the Roth IRA. But if money is pulled out before age 59 ½, it is subject to the 10 percent penalty.
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Answered by: Timothy C. Hilbert, CPA, is a director of audit and accounting and professional services industry group leader with Kreischer Miller in Horsham, Pa.