We received a letter from my husband's former employer offering a lump sum payout of his pension. We know that it's not a great idea to cash this out rather than roll it over. However, we have about a million dollars in other retirement assets but we are very cash poor and need money to send my son to college. I understand they will take 20% off the top but my tax burden will be higher. What should I be aware of?

received a letter from my husband's former employer offering a lump sum payout of his pension. We know that it's not a great idea to cash this out rather than roll it over. However, we have about a million dollars in other retirement assets but we are very cash poor and need money to send my son to college. I understand they will take 20% off the top but my tax burden will be higher. What should I be aware of?
=========>>>>> In general, a lump sum distribution would generally be subject to your ordinary income tax rate as all as the 20%federal withholding requirement. This means that 20 %of your benefits would automatically be withheld by the plan administrator. If you decide not to roll your lump sum payment or you miss the 60-day window, you may have to pay an additional 10%early withdrawal penalty if you?re under age 59 1/2. The IRS allows exceptions to this rule in certain situations. For example, In cases where your employer is offering the lump sum as part of an early retirement package, you may also be able to avoid the penalty if you?re age 55 or older at the time you retire.
Before you take a lump sum pension payout it?s important to weigh all the pros and cons. Understanding how your taxes can be impacted can help you avoid major financial headaches later on


Generally, your pension benefits are fully or partially taxable, depending on how your account was funded. The IRS considers your benefits to be fully taxable if you don?t have any investment in the contract. You?re not considered to have an investment if you didn?t contribute anything to the plan, your employer didn?t withhold contributions from your salary or you got back all of your contributions tax-free in prior years. Since defined benefit pensions are traditionally funded solely by the employer, it?s likely that any money you receive from a lump sum would be considered fully taxable. If your plan allowed you to put in after-tax dollars, then you wouldn?t have to pay taxes on the part of your benefits that represents a return of your initial investment.

Thanks for the reply. Two quick follow up questions/clarification requests if you don't mind. Will taking the lump sum affect our withholding for the following year? I had heard that sometimes taking a lump sum can cause the withholding to go up dramatically the following year. Also, can we avoid the 10% penalty by using the "hardship rule" - that is, using the money for an "immediate and heavy financial need"? We would be using the money to pay for college room and board. Thanks so much for your help!

Will taking the lump sum affect our withholding for the following year?======> I guess in general no; the withholding affeccts the tax year when you received th elum sum ; however aslongas your marginal tax rate is higher than 20% then to avoid underwithholding penalty, you can make an estimated tax payment using Form 1040-ES. If you owe a penalty for under-withholding, fill out Form 2210 to figure the amount you owe .you also need to pay state and local income taxes..

I had heard that sometimes taking a lump sum can cause the withholding to go up dramatically the following year.=======>I guess you mean, say, You should get Form 1040-ES to help you figure your estimated tax liability if your marginal tax rate is higher than 20% fo w/h. Since your situation involves a lump-sum distribution, you may qualify for the 5 year tax option. The election to use the option can be made only once if you were born after 1935, who has reached age 59 1/2 at the time the distribution is made, may be able to use the 5-year tax option. Thus, you may also need Form 4972 to make an accurate estimate of your income tax liability.

Also, can we avoid the 10% penalty by using the "hardship rule" - that is, using the money for an "immediate and heavy financial need"? We would be using the money to pay for college room and board. ======> You will need to contact your plan administrator to ask what qualifies as a hardship. Some plans might require that you submit proof of the hardship. Others will only ask that you self-certify that you are suffering from the hardship

How do you avoid the underwithholding penalty? Also, can you use the 1040 ES to make just one lump sum payment to the IRS? Thanks so much!

Help filling out form 8965 Health Coverage Exception
________________________________________
I was unemployed for the first part of 2015, I started working in July. Since my income was $0 during the beginning half of the year, I did not have health insurance. I only had health insurance coverage from my employee during the months of August-December 2015. I would like to claim exception A for January-July 2105 on form 8965, because health insurance was considered un-affordable. Which worksheet do I have to complete to "prove" this?
======>As your Health insurance coverage was unaffordable based on your income, you file your 2015 tax return using Form 8965; The exemption is reported by entering your ECN in Part I of Form 8965 in column C. If your income is below your filing as your insurance is unaffordable and if you have an offer of coverage thru an employer, you need to enter code A for each applicable month on form8965 part 3


I've done the Marketplace Coverage Affordability Worksheet and calculated that my "required contribution for the month" is zero. (Line 12) Is this the right worksheet?
======>>


Will taking the lump sum affect our withholding for the following year?======> I guess in general no; the withholding affeccts the tax year when you received th elum sum ; however aslongas your marginal tax rate is higher than 20% then to avoid underwithholding penalty, you can make an estimated tax payment using Form 1040-ES. If you owe a penalty for under-withholding, fill out Form 2210 to figure the amount you owe .you also need to pay state and local income taxes..

I had heard that sometimes taking a lump sum can cause the withholding to go up dramatically the following year.=======>I guess you mean, say, You should get Form 1040-ES to help you figure your estimated tax liability if your marginal tax rate is higher than 20% fo w/h. Since your situation involves a lump-sum distribution, you may qualify for the 5 year tax option. The election to use the option can be made only once if you were born after 1935, who has reached age 59 1/2 at the time the distribution is made, may be able to use the 5-year tax option. Thus, you may also need Form 4972 to make an accurate estimate of your income tax liability.

Also, can we avoid the 10% penalty by using the "hardship rule" - that is, using the money for an "immediate and heavy financial need"? We would be using the money to pay for college room and board. ======> You will need to contact your plan administrator to ask what qualifies as a hardship. Some plans might require that you submit proof of the hardship. Others will only ask that you self-certify that you are suffering from the hardship

How do you avoid the underwithholding penalty?====>as said aslongas your marginal tax rate is higher than the w/h rate of 20%, then , you need to pay more tax say they withheld $20K(20%) while you need to pay $25K(your tax rate is 25%) ;.i mean since you have income where less tax is withheld( your tax bracket is 25% but the w/h rate is only 20%), you are responsible for paying that tax yourself. You do this by paying estimated taxes. You can avoid a penalty for underpayment of estimated taxes if you meet a "safe harbor" payment amount by paying at least 90% of the estimated tax for the current year or 100% of the tax shown on your return for the prior year(110% I fyour agi is over $150K I guess), whichever is smaller

Also, can you use the 1040 ES to make just one lump sum payment to the IRS? ===>you usually need to pay quarterly basis ; You cannot wait until the fourth quarter due date of January and pay taxes on the full $5K. If you do, it means you paid your first 3 quarters of taxes late and you face interest and penalties charges.however, aslongas you pay at least 90% of the estimated tax for the current year or 100% of the tax shown on your return for the prior year(110% I fyour agi is over $150K I guess), whichever is smaller, you are OK.