I left a job that was going out of business. From that job I had $40.000 in a Retirement Preservation Trust. Moving to a different job meant a big cut in wages. To make ends meet I need to pay off a new car that I had purchased last May before I knew that my job was going down. My bank account is starting to rapidly disappear. If I took $20,000 from that pension before 59, I know that I will pay what amounts to 30% in a penalty and taxes. How much additional taxes would they take at the end of the year when I report that as income?

I assume that the "30%" you mention is the sum of 20% withholding plus 10% penalty - correct? The total amount of tax you owe is dependent on your tax bracket, which in turn is based on your adjusted gross income and filing status. Whether the 20% withholding that they will take out of the check they send you is sufficient or not is impossible for us to say without further information. Also - don't forget state/local income taxes as well (if applicable).

I assume that the "30%" you mention is the sum of 20% withholding plus 10% penalty - correct? <

Yes this is correct

I understand that in addition to this amount, they would tax me again at the end of the year according to the total I made from my job adding on to the money I made from this. Is that correct? Looks like if I paid $20,000 on a car, I would just about break even or possibly owe taxes that would exceed the $40,000 from the $20,000 that I would use.

So Ebaines, am I to believe that my income from my job plus the money that I use from from this pension added together could add up and put me in the 25% bracket?

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Originally Posted by crackerjack1

So Ebaines, am I to believe that my income from my job plus the money that I use from from this pension added together could add up and put me in the 25% bracket?

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Sure - it could. As stated, you haven't provided enough information for me to know. The $40K distribution that you are taking is considered ordinary income, so is added to your wages, investment income, and other income to determine your net income. Depending on your tax bracket and state/local income tax and because of the 10% penalty you may only have about 55% of the withdrawal to actually use.

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Originally Posted by ebaines

Sure - it could. As stated, you haven't provided enough information for me to know. The $40K distribution that you are taking is considered ordinary income, so is added to your wages, investment income, and other income to determine your net income. Depending on your tax bracket and state/local income tax and because of the 10% penalty you may only have about 55% of the withdrawal to actually use.

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Talked to Merrill Lynch. It's all set up. Just have to prepare for a double dip recession that could be on the way. They are setting me up with an IRA. Only thing that I would have to worry about would be the State tax at the end of the year.

Got any suggestions for a low risk moderate gain IRA?

Sounds like you have decided to roll the money over into an IRA? If so, then no taxes or penalties are owed (until you make a withdrawal of course). So why the concern about state tax?