4 good reasons for not tapping your IRA
I left my job and put the funds from my 403(b) plan into
a "rollover" IRA. What would I end up with after taxes and penalties
if I withdrew the entire $4,500 balance? -- Krista
Before the Diva answers your question, she wants to make sure
everyone knows what a 403(b) plan and a "rollover" IRA are.
403(b) plan: A
403(b) plan is a tax-deferred retirement plan sponsored by nonprofit organizations.
It's very much like the 401(k) plans sponsored by for-profit companies; both can
be rolled over into a "rollover" IRA when employees leave their jobs.
"Rollover" IRA: A
"rollover" IRA is a traditional IRA with a twist. The IRS conceived
it as a conduit account for holding funds from precious employer-sponsored retirement
plans until they were rolled over into another qualified retirement account, such
as a traditional IRA or a future employer's 403(b) or 401(k) plan. There's no
limit to how long you can keep the funds in a "rollover" account, you
just can't make future contributions to it.
you love your new employer's plan, go ahead and make the rollover; if not, leave
it alone or roll it over into a traditional IRA if you want to make additional
IRA contributions to it in the future. Either way, you win; you only lose if you
withdraw the funds and cheat yourself of years and years of compound, tax-deferred
Why shouldn't I tap my IRA?
The cost of tapping your IRA far outweighs the benefit. Here's why you shouldn't
- Income tax
- Early withdrawal
- Opportunity costs
- You'll hate
yourself in the morning
tax and early withdrawal penalty
You'd have to pony up the income tax
when you file your taxes, and pay a 10 percent penalty, to boot, if you're younger
than 59 1/2. Depending on your tax bracket and assuming that you'd get hit with
the penalty, here's how much you'd end up with in your pocket if you cashed in
your $4,500 IRA:
IRA distribution in amount of $4,500
Net proceeds after tax
10-percent penalty (1)
filing status is "single," taxable income of $65,550 would push you
into the 30.5 percent tax bracket. Your tax and penalty would be $1,820, and your
net "in your pocket" proceeds would be $2,680 (see chart above).
a breakdown of the taxes and penalties at the various tax rates:
income tax and 10% penalty at various tax rates |
income tax (1)
tax and penalty
To get an idea
of what your top tax rate is, go to the IRS Web site and take a look at its Revised
2001 Tax Rate Schedules. If the IRS schedule gives you a facial tic, try the Diva's
tax rate chart.
Tap the $4,500 in your 403(b) plan and you lose the opportunity
to enjoy tax-deferred, compound earnings for a very long time. According to the
National Vital Statistics Report's life-expectancy table, if you're 20 years
old, you can expect to live for another 58 years; if you're 30, another 48 years
and if you're 40, plan on having 39 more years to live, love and invest. That's
a lot of time for your $4,500 to grow.
Using the Rule of 72,
a 10-percent return doubles your money about every seven years. For more on the
Rule of 72, read the Diva's "Impact
of saving early."
That means at 10 percent, your
$4,500 will double to $9,000 in seven years, $18,000 in 14 years and so on and
so forth, growing to $576,000 in 49 years.
interest doubles every 7 years
any grandfather how fast 49 years can go when you're living a life.
hate yourself in the morning
You're net ("in
your pocket") proceeds after taxes and the nasty 10-percent penalty will
be somewhere between $2,290 and $3,380. You'd be trading a small short-term gain
today for large long-term benefits when you retire.
that $4,500 grow for a bunch of years, and the net proceeds could help fund winters
in Florida, vacations to faraway places and plane tickets for the grandkids. If
the price of tapping that 403(b) is having to give up these pleasures year after
year, you'll surely hate yourself in the morning.
ROSEN has a master's degree in finance, with a specialization in accounting, from
the Kellogg Graduate School at Northwestern University in Evanston, Ill. Rosen
has more than 15 years of experience in the financial arena, serving in Illinois
and Florida as a certified public accountant, financial consultant, expert witness
and educator. She is owner of Dorothy Rosen, CPA, a public accounting firm that
serves individuals and small businesses.