Dear Retirement Adviser,

I am a 28-year-old moderate investor, and I’m trying to buy a home. I have about $5,200 in a retirement cash balance account from a former job. I have the option to roll it over or withdraw it as a lump sum with a penalty, 20 percent federal tax plus possible Massachusetts state tax, leaving me with $4,200.

I am considering taking the cash because I have about $57,000 in loans left from my undergraduate and graduate studies. With the cash, I would be able to just about pay off my loan with the highest interest rate at 7.65 percent, which would save me nearly $40 a month.

I have tried using online calculators, but it seems that the deciding factor is the rate of return on my current retirement portfolio. That rate has been quite low because I had my funds in a money market for the past four years. What is my best option here?

Thank you,

— Christine Collegiate

Dear Christine,

I think your math is wrong. If the distribution is subject to 20 percent mandatory withholding and a 10 percent penalty tax, plus state income taxes for Massachusetts, then you’re not going to net $4,200 on a $5,200 account balance. I don’t know your marginal federal income tax rate, but if it is 20 percent, and you add the 10 percent penalty on top of that, you’re talking about netting $3,640 minus any Massachusetts income tax owed on the distribution.

While you can argue that the income taxes would be due at some point regardless of when you took the distribution, paying the 10 percent penalty tax is $520 out of your pocket. Is it worth it to free up $40 a month in your household finances? The $520 penalty tax represents 13 months of that prized $40.

Your retirement account’s low yield isn’t reason alone to raid the account. Instead, it is reason to change how the retirement money is invested. You can perform an individual retirement account rollover if you don’t want to keep the money with your previous employer and expand your investment options while keeping an eye on fees and expenses.

Later, you could use the first-time homebuyer’s exemption to liquidate the IRA rollover account up to $10,000 to buy, build or rebuild a first home. That strategy would allow you to avoid paying the 10 percent penalty tax.

That’s the approach I like. If you’re building a nest egg for a down payment, use some of that money to pay down your high-interest student loan, and when you’re ready to buy, use the IRA rollover’s first-time homebuyer exemption to avoid the penalty tax and free up those funds for the home purchase. Please don’t raid your retirement account to pay down the student loan.

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