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Question:


I’m 27, with 5 years of teaching under my belt. What penalties would I face for taking $11K from my retirement fund? I want to start my own business. Note: I’m not leaving my job any time soon, and I’ll continue my $250 monthly retirement contributions.
-EducationalEntrepreneur


Answer:


You didn’t indicate what sort of retirement fund you have. You mention penalties, so I’ll assume it’s a 401(k) or 403(b) plan or an individual retirement account. If that’s so, then what you’re contemplating is a really bad idea because of the multiple tax liabilities. Depending on how much you earn and where you live, you may end up keeping barely more of your savings than you give away to revenue authorities.
 
As a teacher with five years’ experience, your top federal income tax rate is probably 25 percent, and you could pay an additional 7 or 8 percent if you live in a state like New York, New Jersey or California that puts a hefty bite on residents’ incomes. Then there is the 10 percent early-withdrawal penalty. That’s 42 or 43 percent in total, meaning you would have a shade over $6,000 to invest in your business.
 
If your idea is a good one, you should be able to find that kind of money from other sources. There’s always a bank loan or credit card (charge what you must but don’t get a cash advance; the interest rate will be onerous). Perhaps you’ve got some friends or family members you could tap.
 
You may be able to borrow from yourself, too. Many 401(k) and 403(b) plans allow loans of up to 50 percent of the account value. In your case that’s $5,500, not much less than you would have left after tax if you cashed out. You would have to make payments, probably monthly, and repay the loan in full within five years. If you had trouble coming up with the payment each month, you could always reduce your retirement contributions. What’s important is that there would be no tax liability as long as you stayed current, and your retirement account would be smaller but still there. Good luck with your business.
-Conrad de Aenlle



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