Dear Tax Talk,
I have a 403(b) plan with about $325,000 that I want to close when I retire in a year to pay off my mortgage, student loans, etc. That will make me debt-free. I currently make $110,000 a year, but will only make $48,000 per year in retirement from Social Security and a pension. I want to avoid the 35 percent tax on the 403(b) withdrawal — or could it even be 39.6 percent? Should I just cash in the 403(b) plan as one lump sum and take the hit, or draw it over two to three years?
— Ron

Dear Ron,
This is a tough question, as I don’t know all the particulars of your tax situation. But you seem to understand the concept that by reporting the income from the 403(b) account over two to three years, it could save you some money that could be used for your retirement rather than paying Uncle Sam.

At first glance, that is probably the better choice rather than taking the lump sum. However, now is the best time to sit down and crunch some numbers.

You need to try and quantify how much you can potentially save in taxes by factoring in the after-tax cost of the interest you’d pay over the next few years, since mortgage interest and student loan interest are generally tax-deductible, subject to certain limitations. One other piece to your puzzle is that your 403(b) grows tax-free while it is still in the account. You will need to know the interest rate you are paying on your mortgage and student loans and the rate of return on your 403(b) account. Finally, you need to factor in the taxability of your Social Security under the different scenarios you have proposed.

Solving the 403(b) withdrawal puzzle

You may want to consider sitting down with a professional who can assist you with tax projections based on different assumptions to help you make the final decision. It seems well worth the time and effort on your behalf.

Retirement is a big step and you have been putting away your money for quite some time, so be careful before you make a quick decision without having more information to guide you.

Thanks for the great question and all the best to you in your retirement years.

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