I found out a few weeks ago I have a pension from an old employee and they are making lump sum payouts to get rid of it. I am 99% sure we will put it into an IRA, but it is a little tempting to use the money or some of it to fix the house up and sell it to move closer to DD's school and maybe make my commute less insane (2.5 hours per day, all together).
Can you tell me if the taxes and penalties are the same or different between Scanario A and Scenario B: A) I take a lump sum payout and pay taxes plus 10% penalty. B) I put it in an IRA (non Roth) and decide in 6 months (same calendar year) to cash out the IRA and pay taxes plus 10% penalty.
Assume there is no difference in my or DH income between A and B and for the sake of arguing that interest return is 0% (it didn't gain or lose value in 6 months in scenario B). Is there a penalty I'm not considering for B?
P.S. I'm not saying we will do either A or B. Probably we will do C which is set up an IRA and not touch it for 25 years. Like 99% probably. I just want to understand IF we decided to take the payout and penalty, is there any reason we MUST do it NOW as opposed to just parking it somewhere safe and then deciding 100%.
Post by oldbaylover1024 on Feb 1, 2017 8:56:04 GMT -5
It's really an "it depends" situation. I'd have to see your entire tax situation to know what kind of penalties you may be subject to.
In some instances, you can take a retirement plan distribution penalty free. For example, if you use the money to purchase a new primary residence (I cashed out a retirement account when MH and I bought our home - it was a tax-free distribution, but I did have to ensure the coding on the 1099-R was correct). But there are restrictions there, too.
Do you use a tax preparer or do you do your own returns? I ask because the retirement specialist that manages your IRA may not have all the tax knowledge you need. This is a discussion that has to be between all three parties (you, IRA guy, tax guy) so you're all on the same page with how to code the distribution.
PAL May '17 Siggy Challenge: Picnics - Feminist Picnic
Two MM/C 1/09/12 & MM/C 4/26/12 BFP#3 - Rainbow #1 born 5/11/13 via unplanned C-section Two CP 11/23/15 & 5/13/16 BFP#6 - Rainbow #2 born 2/10/17 via planned C-section
Poop. I was just hoping you'd know if the timing mattered.
I do want to buy a primary residence but we need to do ~$10k-15k work on our current house to sell it, so that is where the money would go. It would not be a first time home purchase for me, though technically it might be for DH since our current house is in my name only. We refinanced but it was HARP and they only redid it exactly as it was (my name only).
We do our own returns but have never had anything tricky before. Not opposed to using a preparer next year if we did end up cashing out. Again I am 99% sure we won't and we'll just wait to see if there is any kind of accident settlement and/or work bonuses and use that to fix up the house.
DH seriously explored building a guest house in the back corner of our yard (two step kids and in laws and my mom and friends) when he got his pension cash out. That was a total crazy pipe dream to me --- appealing yes but hello a million things would happen before that.
But he really did look into it and there were penalties, fees and taxes. It made it not appealing. Not all of them were apparent on the front side. So not super helpful - except to say really look into it (he got the fund on the phone with our CPA - FIL).
I do have a financial advisor - sort of - through work, but can't speak to him for another week. He of course is dead set against a payout. He also doesn't commute 2.5 hours daily. Jelly!
DH and I had a Roth IRA that we cashed out just shy of 5 years and I believe we had to pay an additional penalty on top of the 10%. Maybe that's a difference between a traditional IRA and a Roth IRA, though. I'd have to ask DH if he recalls what the additional penalty was for.
Thanks, guys. I get that there may be penalties, I just want to make sure my main question is clear. Is there a difference between taking the payout now vs putting it in an IRA for a few months and then cashing it out?
No there shouldn't be a difference on penalties between cashing out the pension or cashing out an IRA 6 months later as long as all the codes are right on all of the 1099Rs. This also could change since we are basing this knowledge on 2016 tax law not what 2017 tax law might be.
No there shouldn't be a difference on penalties between cashing out the pension or cashing out an IRA 6 months later as long as all the codes are right on all of the 1099Rs. This also could change since we are basing this knowledge on 2016 tax law not what 2017 tax law might be.
True. There are likely to be changes this year.
I'm just running out of time to make the decision. Like I said I am 99% sure I will put it in an IRA and leave it there, I just don't want to let inertia make the decision for me if there could be unforeseen consequences if I change my mind, if that makes sense.
Then Comes Family, LLC is a participant in the Amazon Services LLC Associates Program, an affiliate advertising
program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.