Duvall & Associates, Inc.
BUSINESS ADVISOR NEWSLETTER
 

 Taxation of pension withdrawals

- by Alan Duvall 

Published in Dayton Daily News  May 6, 2007 

“Help me if you can, I’m feeling down.”  -Beatles 

Recognizing Americans tend to be spendthrifts by nature, Congress has designed the private retirement system upon a reward-punishment platform. 

Timely contribute funds into a retirement plan and employees are rewarded with deductions and tax-free earnings.  On the punishment side, pension funds distributed prior to the age of 59½ are saddled with regular taxes and a 10% penalty.   

But like Oz’s Tin Man, Congress can find a heart and has enacted a myriad of hardship distribution exceptions to imposition of the 10% penalty.  In each situation, income tax is still payable and studious reading of rules is required to insure complete compliance with exception parameters.  

Qualifying pension withdrawals to satisfy family medical needs, or IRA payments (in the case of unemployed individuals) for health insurance, may be penalty-free if the expenses are eligible for itemize deduction. 

Distributions from individual retirement or 401(k) plans may be penalty-free if paid on account of family postsecondary education expenses.  Eligible education expenses include un-reimbursed tuition and fees, room and board, books, supplies and curriculum-required equipment.  

First time homebuyers may receive penalty-free IRA funds of a maximum lifetime $10,000 used within 120 days of receipt to buy, build or rebuild a principle residence.  401(k) distributions may also be available for purchase of a residence if allowed by plan terms. 

401(k) plans may allow distributions for additional financial hardship situations such as family funerals, casualty related residence damages, or residence eviction prevention payments. 

Pension distributions may also be penalty-free if paid to beneficiaries upon employee death, or (in the case of non-IRA funds) to divorced spouses pursuant to Qualified Domestic Relation Orders. 

Alternatively, employer retirement plans may provide for plan loans to employees of up to $50,000 provided such loans are repayable within 5 years (home loans may have longer terms), bear a reasonable interest rate and are adequately secured. 

“Help me get my feet back on the ground.”  -Beatles

Alan Duvall is a certified public accountant in Dayton.  Contact him at Alan@Duvallcpa.com.