Investing in a pension plan allows you to put away money that you can live on after you retire. Because pensions are typically funded with pre-tax dollars, most pension withdrawals are subject to income tax. If your pension falls into this category, you will owe income tax on your withdrawals, even if you're over age 67.
If you made no contributions to your pension plan, or if you contributed only pre-tax dollars, the full amount of your pension withdrawals will be subject to income tax regardless of your age. If you contributed any after-tax dollars to your pension account, you won't owe tax on that portion of your withdrawals. However, you will still owe income tax on the remainder of your withdrawals. The taxable portion of your withdrawals may be subject to income tax withholding.
Early Withdrawal Penalty
If you are over age 67 when you begin making withdrawals from your pension plan, you'll avoid the early withdrawal penalty. This penalty applies only if you withdraw money from your pension before you reach age 59 1/2. If you trigger the early withdrawal penalty, you will owe a penalty tax equal to 10 percent of the amount of your withdrawal. This tax applies in addition to any income tax you may owe on the payments you receive.
Waiting too long to begin making withdrawals from your pension can also trigger an additional penalty. The Internal Revenue Service requires you to begin receiving periodic payments from your pension plan by the time you reach age 70 1/2. The amount you much withdraw each year depends on the plan's balance, as well as your life expectancy. If you fail to withdraw your minimum payment each year, you will owe a penalty tax equal to 50 percent of the amount you should have received.
You can avoid paying income tax or an early withdrawal tax on your pension plan by rolling the funds over into another qualified retirement plan or an IRA. However, you will still owe income tax when you begin making withdrawals from the new account. Furthermore, you must still begin making minimum withdrawals by the time you reach age 70 1/2 or you'll owe an excess accumulations tax.
Amanda McMullen is a freelancer who has been writing professionally since 2010. She holds a bachelor's degree in mathematics and statistics and a second bachelor's degree in integrated mathematics education.