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Thread: tax question

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    tax question

    I have a tax question for any of you accountants out there.

    At my previous job we had a pension and a 401K. One of the options for the pension is to receive a lumpsum payout. I'm considering taking the lumpsum since I would love to get my student loans paid off. If you take the lumpsum payout 20% is withheld for Federal tax purposes. What I don't know is where the amount would be reported on my tax return---is it just reported with regular income?

    My basic question is would my tax liability for this amount end up being more than the 20% that I would have withheld.



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    Re: tax question

    I have the same decision to make. 20% is withheld, but it would be taxed as ordinary income as far as I can tell, so you would owe more depending on your tax bracket. Factor in state income taxes as well. And the 10% penalty. So you could be looking at roughly 40% gone.


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    Re: tax question

    Whatever your stunden loan interest rate, you'll be paying less of a penalty than if you try to cash your 401K out.

    I'd suggest rolling into an IRA and if you want to get real creative into a Roth IRA. You'll pay income tax on it, but nothing after that. If you're young man, I think it's a no bainer because you have a lot of gain in front of you.



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    Re: tax question

    Quote Originally Posted by Bobber View Post
    Whatever your stunden loan interest rate, you'll be paying less of a penalty than if you try to cash your 401K out.

    I'd suggest rolling into an IRA and if you want to get real creative into a Roth IRA. You'll pay income tax on it, but nothing after that. If you're young man, I think it's a no bainer because you have a lot of gain in front of you.

    I'm just looking at cashing out the pension not the 401k. I'm not talking a lot of money with the pension, but it could pay off the loan.



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    Re: tax question

    Well that willl depend on your total income level and your tax bracket. May be enough, may not.



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    Re: tax question

    The opportunity cost is pretty large taking that large of a tax hit. Most any advisor would suggest you not do it I'm guessing, at least everything I've read on it goes that way.

    If you roll into an IRA, and you haven't owned a house in the past 3 years, you'd also be able to take out a certain amount to buy a new home too.

    Roth versus regular IRA depends on what your tax bracket is now, and what it might be when you withdraw the money. The tax rates are the only determinant there.
    Lot of things to consider for your individual situation.


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    Re: tax question

    not a lawyer but any money, no matter how small, in retirement savings should be left there or transfered to another similar account. have them do it. don't take a check to transfer it. If you put $2000 in an account at age 21 every year for 10 years and then stop contributing, and I start at age 31 putting $2000 every year after that. I will never catch you. Age is on your side. Let your money work for you. Its what I would do. Its what I should have done 30 years ago.


    Last edited by mmiille; 08-02-2010 at 09:12 PM.

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    Re: tax question

    Quote Originally Posted by mmiille View Post
    not a lawyer but any money, no matter how small, in retirement savings should be left there or transfered to another similar account. have them do it. don't take a check to transfer it. If you put $2000 in an account at age 21 every year for 10 years and then stop contributing, and I start at age 31 putting $2000 every year after that. I will never catch you. Age is on your side. Let your money work for you. Its what I would do. Its what I should have done 30 years ago.
    Because that is TOTALLY practical. I'm very healthy financially and there is absolutely NO way I could be putting $2,000 off to the side right now at 21. You'd have to have a good job, little living expenses, and mommy and daddy paying for everything.



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    Re: tax question

    Quote Originally Posted by IcSyU View Post
    Because that is TOTALLY practical. I'm very healthy financially and there is absolutely NO way I could be putting $2,000 off to the side right now at 21. You'd have to have a good job, little living expenses, and mommy and daddy paying for everything.
    But in the case of the OP, he's had a job with a pension plan, so he's been putting this money aside. In his case, I don't see the wisdom in taking money from retirement to pay student loans. If the student loans are close enough to being paid off that this would work, he could just up his monthly payment in knock this out in no time while keeping his retirement money.

    To me, touching retirement money is always a bad idea. Maybe that's because I'll hit 40 in a couple of years, but it looks like a horrible idea to me.


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    Re: tax question

    I cashed mine out when i quit my last job... I had to pay taxes on top of what they took out, but it couldn't have been that much.

    $2000 right now is more useful to me than $10,000 forty years from now... future me probably sucks anyway; he'll get over it



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    Re: tax question

    Quote Originally Posted by IcSyU View Post
    Because that is TOTALLY practical. I'm very healthy financially and there is absolutely NO way I could be putting $2,000 off to the side right now at 21. You'd have to have a good job, little living expenses, and mommy and daddy paying for everything.
    Well then you're not as healthy financially as you think. That's $166/month. Throw in you don't pay taxes on it right now and you're in effect only half to put about $125/month away.

    I've put money in saving ever since I started working and have no regrets. As a matter of fact, that looks pretty darn good 20 years later....



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    Re: tax question

    Quote Originally Posted by CycloneErik View Post
    But in the case of the OP, he's had a job with a pension plan, so he's been putting this money aside. In his case, I don't see the wisdom in taking money from retirement to pay student loans. If the student loans are close enough to being paid off that this would work, he could just up his monthly payment in knock this out in no time while keeping his retirement money.

    To me, touching retirement money is always a bad idea. Maybe that's because I'll hit 40 in a couple of years, but it looks like a horrible idea to me.
    I agree. Is student loan interest deductible?



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    Re: tax question

    Quote Originally Posted by CycloneErik View Post
    But in the case of the OP, he's had a job with a pension plan, so he's been putting this money aside.
    By definition, a pension plan is funded by your employer, not the individual employee. This is not a 401k plan so the OP has not been "putting this money" into the plan. His former employer was.

    That said, your student loan should have a very favorable interest rate and in many cases the interest is tax deductible. IMO, you shouldn't cash out your pension to pay off your loans since it is essentially "cheap money".

    Additionally, since the OP is not age 59 1/2, he/she will pay a 10% excess tax. Just not a smart move in most cases.


    Last edited by capitalcityguy; 08-02-2010 at 09:35 PM.
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    Re: tax question

    Quote Originally Posted by Bobber View Post
    Well then you're not as healthy financially as you think. That's $166/month. Throw in you don't pay taxes on it right now and you're in effect only half to put about $125/month away.

    I've put money in saving ever since I started working and have no regrets. As a matter of fact, that looks pretty darn good 20 years later....
    Plus potential 401k matching


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    Re: tax question

    Quote Originally Posted by Bobber View Post
    Well then you're not as healthy financially as you think. That's $166/month. Throw in you don't pay taxes on it right now and you're in effect only half to put about $125/month away.

    I've put money in saving ever since I started working and have no regrets. As a matter of fact, that looks pretty darn good 20 years later....
    With Iowa State taking a chunk, insurance, rent, groceries, car payment, etc. and the car payment being the only debt I have, I'm very very healthy for a 21 year old. The car payment is scheduled to be done 2 years early on the loan, and is only stretch out so if something would happen and I'd need money, I don't have to ask mom and dad for a penny. Haven't gotten anything other than occasionally gas money and a thing or two while I'm home and I'd prefer to keep it that way. I'm financially independent of them and don't carry much debt, which puts me way ahead of most of my peers.

    Now CyDude16, where are you to talk about financial health?
    Quote Originally Posted by Bobber View Post
    I agree. Is student loan interest deductible?
    Yes.



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