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Columns: Dr. Don
Don Taylor, Ph.D., CFA, CFP   Expert: Don Taylor, Ph.D., CFA, CFP
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Penalties lifted in some circumstances
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Layoff may help worker tap 401(k) early
 

Dear Dr. Don,
My husband has worked for the same company for 35 years. His department has been diminished and he is being forced into retirement. His retirement savings plan needs to be moved, and the company has told us that a rollover is the best way to go. But we know nothing at all about this and have many questions.

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Is there any break he can get on the taxes that might be owed for an early withdrawal? Because this is a forced move, we will need a small portion to pay off some things so we can live on less money each month. We want to keep the rest of the money in some IRA-type account for the years ahead. Any help would be greatly appreciated.
-- Debbie Debacle

Dear Debbie,
It's possible that his retirement account doesn't need to be moved. In general, the choices are to keep the money invested with his former employer, roll the money into a traditional IRA account, or, if he were to find a new job, invest the money in the new employer's plan. An earlier Dr. Don column, "Moving 401(k) from former job," provides some additional details.

Depending on your husband's age, he may be able to avoid the penalty tax without transferring the money into an IRA rollover account. If he was at least 55 when he separated from service, he doesn't have to pay the penalty tax on distributions out of the retirement plan.

Before age 59, nonqualified distributions from the traditional IRA account can trigger a penalty tax of 10 percent and income taxes on the distribution. Annuitizing a portion of the money using a 72(t) withdrawal may help avoid the 10 percent penalty tax. The Bankrate's, 72(t) calculator can help you estimate the size of these payments, but you shouldn't consider 72(t) withdrawals without first consulting with a professional tax adviser.

If any of the investments in the retirement plan are company stock, then an IRA rollover may not be appropriate for the company stock portion of his account. If that's the case, he should work with a professional tax adviser in arranging the transfer of company stock into a taxable account at the same time he's rolling over the balance of the account into the traditional IRA. If you've caught the running theme in my reply, it's to get professional tax advice.

Bankrate.com's corrections policy -- Posted: Nov. 1, 2007
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