Lump Sum Distributions from a qualified plan I think it is safe to say that that the majority of us in class participate in our company's retirement plan. While a tough economy has certainly rubbed off some of the luster to retirement plans through diminished matching by employers and slower growth due to a sluggish stock market, a 401(k) or 403(b), in my opinion, is still a best bet for saving for retirement.      What many of us do not familiarize ourselves with are the circumstances in which you may receive a distribution or the tax effects of receiving that distribution. Before we discuss an issue I have with the tax effect of a lump sum distribution, I think it is important to state what is deemed as acceptable situations in which you can receive your distribution early. Separation from employment and disability, just to name two, are both qualifying conditions which allow for an early lump sum distribution. It should be noted, that you will always pay tax on any amount you receive, but a penalty for early withdrawal is not accessed if you have reached age 59 1/2. Question: If you withdraw money from a qualified plan for the purchase of a home and you are a first time home buyer, you can get a deduction of up to $10,000, and you won't be penalized the ten percent for early withdrawal but you still pay tax on the amount that you receive. The issue I have is this - this country has all types of programs in place to encourage home ownership, but will tax you on an amount used for that very purpose. I welcome all responses. Does this seem fair ?

Lump Sum Distributions from a qualified plan

I think it is safe to say that that the majority of us in class participate in our company's retirement plan. While a tough economy has certainly rubbed off some of the luster to retirement plans through diminished matching by employers and slower growth due to a sluggish stock market, a 401(k) or 403(b), in my opinion, is still a best bet for saving for retirement.

     What many of us do not familiarize ourselves with are the circumstances in which you may receive a distribution or the tax effects of receiving that distribution. Before we discuss an issue I have with the tax effect of a lump sum distribution, I think it is important to state what is deemed as acceptable situations in which you can receive your distribution early. Separation from employment and disability, just to name two, are both qualifying conditions which allow for an early lump sum distribution. It should be noted, that you will always pay tax on any amount you receive, but a penalty for early withdrawal is not accessed if you have reached age 59 1/2.

Question: If you withdraw money from a qualified plan for the purchase of a home and you are a first time home buyer, you can get a deduction of up to $10,000, and you won't be penalized the ten percent for early withdrawal but you still pay tax on the amount that you receive. The issue I have is this - this country has all types of programs in place to encourage home ownership, but will tax you on an amount used for that very purpose. I welcome all responses. Does this seem fair ?