[eastcoastpat]

I am being laid off from my job at 28 years old. I have been with the company for 6 1/2 years. I have 27,000 in my 401k and 40,000 in my pension. I need to supliment my income while on unemployment. So I wanted to completley liquidate the 77,000. I was thinking I should wait until the beginning of 2010 so I wouldn't be put in a higher tax bracket with income I already have made in 2009. If I could walk away with even 1/2 of the 77,000 I would be in good shape. I know that would be a big loss, but in tough times I have to do what I have to do.

My other question is if I do get a big lump sum will unemployment look at this as income, and not want to pay me.

[ScottGem]

Unemployment won't look at this. But I strongly urge you to reconsider. First you probably won't be able to cash out the pension. Second, throwing away over $10K is never a good idea.

[eastcoastpat]

I understand throwing away money is never a good idea. But in my current situation I don't have many other options. Unemployment won't be enough to support my family. And in this tough economy, it will be hard to find a job within a short period that will pay me more than the 2,000 a month unemployment is offering. I think I am young enough to be able to cut some losses and rebuild my retirement hopefully in the near future.

As for my situation, I work at sunoco eagle point oil refinery in New Jersey. They are shutting the plant down with the hopes of restarting sometime in the future. This will take a few more weeks, so I still have a job until the middle of December. Then I can either furlough or take a severance package. So my pension is mine to do what I like with. Maybe I don't have to pull out every thing all at once. But just enough until I can get back on my feet. But I need some insight into what the penalty fees and taxes would be.

[ScottGem]

Did they tell you specifically that you can cash in your pension? Remember defined benefit plans, like a pension (401(k)s are defined contribution plans) are subject to federal rules and generally can't be cashed out.

As to the 401(k), you will pay a 10% penalty off the top. Then the balance of the distribution will be added to your taxable income for the year. How much will be taken towards taxes depends on your total income.

Cashing out retirement benefits is a last resort thing. You don't do it until there is no other option. I lost my job last December, but I've been keeping things together using a variety of income sources and haven't even thought of tapping my 401(k).

[ebaines]

As to the 401(k), you will pay a 10% penalty off the top. Then the balance of the distribution will be added to your taxable income for the year. How much will be taken towards taxes depends on your total income.

One correction - the full amount of the withdrawal is taxable as ordinary income - not just the net after the 10% penalty, So if you withdraw $27K from your 401(k) you will have to pay $2700 in penalty plus income tax on the full $27K. Also, don't forget you will have to pay state income tax on the withdrawal as well.

I agree with ScottGem's advice. But if you do decide to go ahead with the withdrawal I agree that it is probably best from a tax perspective to wait until 2010 for precisely the reason you gave.

[ScottGem]

Whoops, did I say that? I remember thinking, when I wrote, to make it clear that the whole distribution was taxable. And then I typed the opposite.

[eastcoastpat]

Thank you all for the advice. I will talk to human resources about the pension. I will repost and let you all know what the outcome of that will be.

Thanks again