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Can you tell me if there are any downsides to contributing to a tax-deferred retirement program offered by my employer?
Tax-deferred retirement plans are a great way to save towards retirement. If you start now as a teenager, you have many years to grow your investment. However, while there are many tax benefits to tax-deferred retirement plans, there are also a few possible disadvantages. The three most likely disadvantages are:
Limited access to funds: Tax-deferred plans are designed for retirement income. So, if you take your money out before age 59½ you will have to pay a 10% penalty unless you use the money to purchase your first home or to go to school.
Income tax: Income tax must be paid on a tax-deferred account when the withdrawal is made. So, if you withdraw $1,000, you will have to pay taxes on that amount in the year that you withdraw the money.
Limited investment options: Some plans only offer a small selection of investment choices.
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