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I will be 56 on March 21, 2000. I have just retired after 35 years and elected to take the lump sum pension plan distribution. I received a check for the lump sum last week. I plan on putting the money into an IRA within the 60 day limit. My question is: What will be the consequences if I take $50,000 out right away to pay off my house? I never thought that retiring would be this confusing!! Any input will be appreciated.
KsGolfer
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Unfortunately, every dollar you do not rollover into a rollover IRA will be taxed to you as ordinary income in the year it occurs. Further, because you are under the age of 59 1/2; you will be assessed a 10% penalty of the amount withdrawn unless you create a SEPP program using §72(t)(2)(A)(iv).

TheBadger
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Greetings, KsGolfer, and welcome. You asked:

<<I will be 56 on March 21, 2000. I have just retired after 35 years and elected to take the lump sum pension plan distribution. I received a check for the lump sum last week. I plan on putting the money into an IRA within the 60 day limit. My question is: What will be the consequences if I take $50,000 out right away to pay off my house? I never thought that retiring would be this confusing!! Any input will be appreciated.>>

You may take the $50K before you transfer the money to an IRA. When you do, you will only be taxed at ordinary rates on that sum because it came from a distribution you received from your qualified retirement plan after you attained the age of 55.

Be aware that for tax purposes you will actually be taxed on that $50K plus whatever was held from your plan distribution when you got the check. By law, the plan must withhold 20% of any plan distribution sent to you against your potential income tax bill for the year. It's just like the money withheld from your paycheck each payday, and it represents an advance payment on your yearly tax bill. Whether you realize it or not, that happened when you got the plan distribution yourself. Thus, if you intend to keep $50K on top of that, you should estimate your tax bill for the year to ensure enough money was withheld to ensure you don't end up paying a penalty for not having enough withheld during the year. If you're not sure how to do that, then talk to your tax advisor.

Regards..Pixy
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Pixy is right; I was wrong; no 10% penalty will apply. I flat out mis-read the posting.

TheBadger
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