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I will retire next April or May. I will receive cash balance pension & 401K totalling about $30-35K (my second time around with this company; retired in '98 and took the big payout). My 2nd mortgage will be about $20K at retirement. My plans are to pay it off completely with the new cash settlement.

Question: Wouldn't I be better off to roll it over into my current IRA, then take out only the $20K needed to pay off the mortgage? It seems to me taxes on $20K would be a lot less than on $35K, and I may not need the excess right away. Otherwise, I think I would face a huge 'lump sum' tax right off the bat, no?

Is my reasoning on this correct?

Thanks.

Ralph Miller
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Assuming you are over age 59-1/2, once you leave the company you should be able to take the $20K directly from your 401K or your IRA without paying the penalty but with paying income taxes. You will only pay income taxes on the money you take out of the plans. So a rollover to an IRA for the rest of the funds will save you income taxes on them.

Note that your tax rate next year could be quite high from the time you have worked. If you waited to pay off the mortage until the next tax year, your income that year could be a lot lower so maybe your tax rate would be lower too. Check it out before you decide.
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Ralph -

I seem to vaguely recall some provision that if you took a lump-sum distribution from a retirement plan, you could spread out the tax payments over several years. You might want to research that.

But your intuition is correct between the two alternatives you proposed.
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jrr7 writes:

I seem to vaguely recall some provision that if you took a lump-sum distribution from a retirement plan, you could spread out the tax payments over several years. You might want to research that.

Income averaging of lump sum when everything has been disributed by an employer from from the same type of plan (i.e., defined benefit or defined contribution)in the same year is now available only to those who were age 50 or older on January 1, 1986. Those folks may use ten-year averaging as described in IRS Publication 575 (Annuity and Pension Income) available for download at http://www.irs.ustreas.gov/forms_pubs/pubs.html. For everyone else, income averaging is no longer available.

Regards..Pixy

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