[duanesplexi]

Hi there. This is a question regarding early 401k disbursements and retirement. Here's the scenario:

I am 49 and fried. I have the option to retire, not formally but on my own. Barring any kind of part time work income after a period of rest, I would be looking at financing my retirement with a combination of savings and a single annual disbursement from my company at my choosing. The company allows this option if an employee terminates. I have roughly $100,000 in my 401k. I would look to leave it with the company and take $6,000 a year in one payment. I would assume 20% would be withheld. Not sure about a penalty. This payment ($4800 or so) along with $6,000 a year I would use from savings would be enough for me to get by for a while. Of course there is the issue of health insurance etc. Mywife and I have set ourselves up nicely in a small home in the country with low taxes and little in the way of expenses. For income tax purposes, I am looking at roughly $5,000 per year in taxable interest on my savings in addition to the disbursement from the 401k. To start with $11,000 with 20% withheld from the $6,000 disbursement seems below the poverty line. If my wife made maybe $10,000 part time and we filed jointly, it's a total of $21,000. We would have the usual deductions. Mortgage interest and real estate taxes. For all intents and purposes, I would be an unemployed person living on this combination of savings. My question is How would this play out as regards the 401k disbursements? Is this doable? How do the 20% withholding and 10% penalty figure into the equation? Thanks very much! Stewart Sumner

[AtlantaTaxExpert]

Stewart:

If you have to pay the 10% penalty, that MUST paid regardless of however much (or little) you otherwise owe. At 10%, that would be $600. Now, if you transfer the money to a rollover IRA, then take the money out incrementally in roughly equivalent amount based on your acturially-decided life expectancy, you can avoid the early withdrawal penalty, regardless of your age.

Given the amounts of income you are discussing, you should owe no other income taxes other than the 10% Early Withdrawal Penalty.

[duanesplexi]

Thank you very much! This is great news. Of course for now I will try to hang on. It will shake itself out. Thanks!

[AtlantaTaxExpert]

Glad to help!