When you cash out a pension, the IRS withholds 20% before you see a dollar — and that is only a deposit against your real tax bill. This calculator shows your true net proceeds after withholding, the 10% penalty if you are under 59½, and whether a direct rollover to an IRA would keep you whole.
Situation: Dana, 55, retires and is offered a $250,000 lump sum. She has $60,000 of other income and files single. She takes the cash instead of a rollover.
Rate / rule: The plan must withhold 20% (§3405(c)). She is under 59½, so §72(t) adds a 10% penalty. The full $250,000 stacks on top of her $60,000, pushing most of it into the 24–32% brackets.
Calculation: $250,000 × 20% = $50,000 withheld. Federal tax on the stacked distribution ≈ $69,357. Penalty $250,000 × 10% = $25,000. No state tax.
Situation: Dana instead signs a direct trustee-to-trustee rollover form before the money leaves the plan.
Rate / rule: A direct rollover is not a taxable distribution: no 20% withholding, no §72(t) penalty, nothing reported as income. Tax is deferred until she withdraws.
Calculation: $250,000 × 0% withheld = $250,000 fully invested. Tax this year: $0. Tax deferred to future withdrawals.
Situation: Robert, 62, takes a $90,000 lump sum with $30,000 of Social Security and part-time income, filing jointly.
Rate / rule: No 10% penalty (he is past 59½). The 20% withholding still applies, but his bracket is lower, so withholding may over-cover the bill.
Calculation: $90,000 × 20% = $18,000 withheld. Federal tax ≈ $12,000 at the 12–22% stacked rate. No penalty.
FedTax = tax on (other income + lump sum) − tax on (other income alone), computed bracket by bracket.
Penalty = 10% × lump sum, only if age < 59½ and the payout is not a rollover.
Withholding = 20% × lump sum, mandatory on any eligible rollover distribution paid directly to you.
Surprise at tax time = FedTax + Penalty + StateTax − (Withholding + StateWithholding).
| Rate | Single, taxable income | Married filing jointly |
|---|---|---|
| 10% | $0 – $12,400 | $0 – $24,800 |
| 12% | $12,400 – $50,400 | $24,800 – $100,800 |
| 22% | $50,400 – $105,700 | $100,800 – $211,400 |
| 24% | $105,700 – $201,775 | $211,400 – $403,550 |
| 32% | $201,775 – $256,225 | $403,550 – $512,450 |
| 35% | $256,225 – $640,600 | $512,450 – $768,700 |
| 37% | over $640,600 | over $768,700 |
The single most common mistake with a pension cash-out is treating the 20% mandatory withholding as the final tax. It is not. Under IRC §3405(c), any eligible rollover distribution paid directly to you — rather than sent trustee-to-trustee to an IRA — must have 20% withheld. That is a deposit, not a settlement.
Your actual liability depends on how the distribution stacks on top of your other income. A $250,000 lump sum paid to someone with $60,000 of other income lands mostly in the 24% and 32% brackets, so the real federal tax is well above the 20% withheld. The gap is due the following April, often with an underpayment penalty attached.
There is a second trap: many people assume they can "withhold the 20%, then roll the rest over within 60 days." You can, but you must replace the $50,000 that was withheld out of your own pocket to keep the full amount tax-deferred — otherwise the withheld portion is treated as a taxable distribution.
Separating from service at 55 or later generally lets you take plan distributions without the 10% early-withdrawal penalty, thanks to the age-55 separation exception. That exception applies to a qualified plan, not to an IRA you roll the money into, which is one of the few reasons to delay a rollover.
Below 55, the 10% penalty under §72(t) stacks on top of ordinary income tax. On a $250,000 distribution that is $25,000 of pure penalty. Exceptions exist — total and permanent disability, medical expenses above 7.5% of AGI, a qualified birth or adoption, and substantially equal periodic payments — but most retirees taking a cash-out do not qualify for any of them.
This calculator applies the penalty automatically when your entered age is under 59½ and the payout type is cash rather than rollover.
| Factor | Cash out today | Direct rollover to IRA |
|---|---|---|
| 20% federal withholding | Yes, mandatory | None |
| 10% penalty under 59½ | Applies | None |
| Taxable this year | Full amount | $0 until withdrawn |
| Capital available now | Yes (net) | No |
| Age-55 separation exception | Available in a plan | Lost in an IRA |
| Creditor protection | Weak once deposited | Strong in most states |
Cash out only when you genuinely need the money now. If the goal is flexibility, rolling over and withdrawing deliberately year by year usually beats one large taxable event — the brackets are annual, so spreading withdrawals over several years can cut the effective rate substantially.
⚠ Important Disclaimer: This calculator gives an estimate for planning only. Pension taxation involves plan-specific rules, the age-55 separation exception, net investment income tax thresholds, and state treatment that varies widely. Federal brackets shown are illustrative 2026 figures. Consult a CPA or enrolled agent before electing a lump-sum distribution.