[RAH]

My husband received a pension benefit of $65,000 from a previous employer (he's only 30 and still has lots of working years ahead of him - we hope). We also have a second mortgage on our home for $65,000. Aside from the 10% tax that's taken out, what other penalties, taxes, etc. would we have to pay if we decided to withdraw the pesion and pay of the mortgage? I'd prefer to roll it over but it sure would be nice to not have the $750 a month payment on the second mortgage! What should we do?

[ebaines]

My advice is to roll the pensoin distribution directly into a roll-over IRA. You should not treat this as some sort of windfall, because it's not - it's money that ought to be set aside for a time when your husband either retires or can no longer work. And if you have a 2nd mortgage that costs $750/month, I suspect that the $65K pension payout won't cover it. As for taxes - if you keep the money and don't roll it to an IRA you will owe ordinary income tax on the $65K plus a 10% penalty to the federal government, plus whatever income tax you may have in your state. Assuming you are in the 25% income tax bracket, that means that after taxes you will be able to keep about $42,250. Bottom line - roll the money directly to a roll-over IRA.

[AtlantaTaxExpert]

Ebaines covers it all except that he forgot that you will also owe STATE income taxes on the $65,000 distribution.

BOTTOM LINE: DO NOT DO IT!

Roll the money over into a rollover IRA within 60 days of receiving the money and you will owe NOTHING come tax time (though you will have to account for that pension distribution on your 2007 tax return).

If you do not know FOR SURE how to do this, use a competent tax professional to prepare your 2007 tax return.

[ebaines]

Um, ATE - I did mention state taxes.

[AtlantaTaxExpert]

I stand corrected!

Ebaines DID in fact mention state tax liability!

Mea culpa! :-)