Qualified

• Withdrawals from pension plans that you make after reaching the age of 59 1/2 are regarded as qualified under federal tax laws. Distributions you receive as the pay-on-death beneficiary of a pension plan, withdrawals made to disabled plan participants, and withdrawals made to cover a federal tax levy are also types of qualified withdrawals. You can make periodic qualified withdrawals if you turn your pension into a lifetime income stream. Additionally, you can make a qualified withdrawal to cover medical costs if those expenses exceed 7.5 percent of your adjusted gross income. Some withdrawals made by military reservists who were deployed after September 11, 2001, are also regarded as qualified withdrawals.
  
  

Tax

• Most types of pension contributions including deposits into standard 401(k) and 403(b) plans are tax deductible. This means that you do not have to pay income tax on plan contributions during the year that you or your employer invests the money. Pension plans are tax shelters so you do not have to pay income tax until you make a withdrawal. You pay ordinary income tax rather than long-term capital gains tax on your qualified and non-qualified withdrawals, but on the non-qualified withdrawals you also have to pay the federal tax penalty.
  
  

Roth

• Some pension plans include designated Roth accounts and you can make after-tax contributions into these accounts. If you make a qualified withdrawal from a Roth in a plan such as a 401(k) or 403(b) then you do not have to pay income tax or the federal tax penalty. You have to keep your money inside a Roth for at least five years before you can make a qualified withdrawal. Additionally, Roth withdrawals are only regarded as qualified if you are over the age of 59 1/2 or if you become disabled. You can also make a qualified Roth withdrawal as a pay-on-death beneficiary as long as the money has been in the account for five years or more. On a non-qualified withdrawal you pay income tax and the 10 percent tax penalty, but only on your earnings and not on your principal.
  
  

Considerations

• In most circumstances you cannot withdraw money from a pension that your current employer sponsors, however your employer may allow you to make a withdrawal if you are facing a financial hardship such as foreclosure or a major medical bill. Hardship withdrawals, where permissible, are taxed in the same way as other withdrawals so you pay the 10 percent tax penalty for making non-qualified hardship withdrawals. The Internal Revenue Service does waive the tax penalty on non-qualified withdrawals made by people aged 55 and older who are unemployed.