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Question:


I have a 403(b)/TSA retirement account that is worth $20K. What are the benefits of keeping it until I officially retire (in 25 years)? What are the drawbacks of taking that money out now to use for a down payment on a home?
-TinaMoore


Answer:


The biggest benefit of leaving the money where it is is that it will continue to accumulate investment gains tax free until you retire. If your $20,000 produces a modest annual return of 7 percent, it will grow to nearly $110,000 in 25 years, even if you make no further contributions to the account.
 
The other benefit of not withdrawing the money is that you won’t have to pay half of it or more to the IRS and possibly a state tax authority. A distribution is taxed at your highest federal and state income tax rates, and if it is made before you turn 59 and a half (except in certain circumstances related to health or a job loss), the IRS assesses a 10 percent penalty on top of the income tax.
 
There may be a way around the taxes and penalty, but you should think long and hard before taking it. Many retirement plans allow participants to borrow from their accounts. That option may not be open to you because you are no longer an active contributor. Even if it is, you need to consider whether you’ll be able to cover the monthly payments. Remember, you’ll have to make mortgage payments out of your income every month, too, and that income must be pretty meager if you haven’t been able to set enough of it aside for a down payment. With so little margin for error, you could be exposing yourself to serious risk. If things go wrong – and a lot has gone wrong for a lot of people in the last few years – and you default on the 403(b) loan, it’s treated as a distribution and you’re back to the taxes and penalties that you were hoping to avoid.
-Conrad de Aenlle



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