Judge,

First thing to remember, don't rely on retirement personnel for tax advice. Talk with whoever does your taxes to get a true picture of your year end tax situation with each option.

In the interim, if she merely withdraws her retirement rather than rolling it over directly to an IRA, the retirement system is required to withhold 20% in Federal taxes and will hold more if she requests them to do so. Assuming your wife won't qualify for any exceptions to the 10% penalty if she withdraws her retirement, then the total Federal taxes that she will ultimately owe will be what bracket this extra income will fall into on your joint return plus an additional 10%. For instance, if her withdrawal falls into the 25% bracket on your return, then 35% is the actual taxes that will be due on the withdrawal. If that is the case, unless she requests 35% withholding rather than the standard 20%, you will definitely see a reduction in your refund which would be the best case scenario. If your refund doesn't take care of the additional 15%, then you will end up owing when your return is filed for the year she withdraws her retirement.

A withdrawal or monthly retirement checks from the La. Teacher's Returement System is NOT taxable on your Louisiana return. HOWEVER, if the retirement is rolled over to a traditional IRA and then withdrawn, the entire amount is taxable on your Louisiana return. When your wife reaches age 65, current La. law excludes the first $6,000 of retirement income from other retirement items such as an IRA. "Current law" is the key here as there are studies going on presently on what exemptions, credits, etc the state can stop in the future to try to bring in additional funds to the treasury.

To make a long story short, there are many things that need to be considered before y'all make your decision. If you prepare your own returns normally, my best advice would be to bring a copy of your latest return together with an estimate of your current years income and sit down with a tax professional BEFORE you make a decision. Too many times retirement offices or employers don't paint the true picture of the tax consequences of a retirement withdrawal. For some taxpayers, 20% withholding may produce a refund if little or no other income is involved. For other taxpayers, 20% withholding is simply not enough. FYI: The early withdrawal penalty has NEVER been 8%.