Every year as I complete returns I’m confronted with the horrific tax ramifications of cashing out pension plans when you’re under 59 1/2. It’s expensive at any age but when you’re under that age, you pay an extra 10%!
Start with that 10% penalty – then add on your tax bracket – let’s round it off to 20% since this will go on top of all of your other income. Now we’re at 30%. Next, add State Income Tax – let’s say it’s 5%. That makes the total tax bite 35%. If you’re thinking about doing it, get out your last year’s return – or call me – and we’ll go over exactly what that withdrawal is going to cost you. In most cases, that means you have to gross up the amount you take out of your pension plan by 35% so you can pay the taxes and still have the amount you need after taxes are paid. You’ve destroyed an investment in your future and saddled yourself with a “loan” from the future you that just cost you 35%.
With interest rates for loans at all-time lows please explore other options first.
