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I want $20,000 from my 403b. Should I do it as a 5 yr loan @ 4.25 interest, or as a withdrawal and pay the taxes now?

I am able to repay the yearly @4,000. This will allow the $20,000 to remain in the account to continue earning (hopefully) more money.

Dec 03, 2014 by Dwight from Winchester, VA in  |  Flag
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3 votes

Retirement plans should be for retirement and not an emergency cash loan situation, but of course life gets in the way sometimes. I would strongly suggest exhausting all other options before taking a loan from your plan. Can you first generate the needed income with some additional work. It's a 403(b), are you a teacher by any chance? If so, can you pick up some additional work like private tutoring, coaching sports, driver's ed, or can you hold off until the summer and work then? I know this isn't the answer you want to hear, but I would make taking a loan from your retirement plan your last resort. You should definitely read a chapter titled the best way to destroy your retirement plan's savings in Ric Edelman's book The Truth About Retirement Plans and IRAs. In that chapter he lists 10 reason why you should never borrow from your retirement plan. I think it would be very helpful for you to read that first before making any decisions. If you want you can contact me through here https://www.brightscope.com/financial-planning/advisor/contact/901212/ and include your email address and I can send you a scan of the chapter. Good luck to you, hope it all works out.

Comment   |  Flag   |  Dec 03, 2014 from Lemont, IL

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Dwight,

Good afternoon and great question.

If you have the ability to take the loan and comfortably pay it back based on those terms, this would be the best option for certain. This way you avoid any early penalties and taxes that would require an even larger distribution to net the 20K.

I hope this helps.

Brett

Brett@comprehensiveadvisor.com

Comment   |  Flag   |  Dec 03, 2014 from Carlsbad, CA

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Larry R Frank Sr Level 20

You may be able to borrow from your 403b ... but the bigger question is should you borrow it from there? Or from somewhere else? It seems like a "free" source of money ... and that is what creates some faulty thinking. Although these articles talk about this question for 401k's, 403b's are similar in the respect of the effect of borrowing. I hope these help: http://www.401khelpcenter.com/loans.html#.VH-reyx0ztS and http://www.investopedia.com/articles/retirement/05/retirementloan.asp.

If you need some money, simply stopping contributions for a short period of time may be better. At least the money remains in the 403b and gets that growth. Use what you used to contribute to repay a personal loan or low interest credit card. There are no double taxation issues. And there is no risk of tax penalty if you change jobs.

Plus, having to use a personal or credit card loan may make you think twice about why you think you need to borrow in the first place! You see, the perception (myth) that you are borrowing from, and repaying, yourself may actually encourage borrowing you may not really consider doing under other frames of mind.

You didn't state your age ... so please also recheck your plan to see if you are over the age for a tax-penalty free withdrawal.

Sorry to pour cold water on your question ... however, doing this requires extra careful thought about why you want to borrow, and consideration of using other sources for those funds. In the long run, using other sources of money is better for your retirement. Of course, this presumes you're not already retired. In which case, why borrow at all - simply withdraw the money.

Comment   |  Flag   |  Dec 03, 2014 from Roseville, CA

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The only other thing I would add i:, loans are not tax free. When you take the loan out, sure you don't pay taxes upfront or penalty. However when you pay the loan back, you pay it back with after tax money, and once that $20k is paid back with After Tax money, when you retire and take it out again it will be TAXABLE to you. Therefore it is a double taxation. So even though it looks like a good deal it might not be. As others mentioned we don't know your age so 10% penalty might be an issue for you as well. I would suggest sitting down with a Fee- Only, not fee based, Fee- Only Registered Investment Advisor and have him/her take a look at your situation and come up with the best option. Best of luck to you. Michael Mezheritskiy www.VisionaryWealthMgmt.com

Comment   |  Flag   |  Dec 03, 2014 from Farmington, CT

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You may not have a choice other than a loan if you want to take money out of your 403B prior to separation from service. Plans may but are not required to allow for hardship withdrawals under a small set of specified circumstances (check your plan document to find out if your plan allows for hardship withdrawals and if so under what circumstances). If you situation does not fit, than a loan may be the only alternative (other than not taking money out of the plan at all). Note that if you do take a loan, most plans require you to start paying it back immediately through payroll deduction and in total by 5 years (in some cases if its a loan for home purchase you can stretch the payback to 15 years). Note also that if you leave the company the entire loan must be paid back in full or else the unpaid balance is considered a taxable distribution and subject to taxation and the pre-59 1/2 10% IRS penalty. Also check the fees...most plans have them for loans.

Comment   |  Flag   |  Dec 03, 2014 from Fort Washington, PA

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Hi Dwight, as indicated above the question you ask does not have an easy answer. Using your retirement savings as an ATM is NOT a good idea. However, sometimes it does make sense to borrow against your 403(b) account if the plan will allow it. The basics are you can take out a loan for 50% of your balance or $50,000 whichever is less. When you take out the loan there may be a charge to do so. You must begin paying off the loan immediately and have 5 years (or more) to do so depending on the reason for the loan. Your loan money is not withdrawn from the retirement plan, it is set aside and earns something - usually around 2%. See your HR person or your Summary Plan Description for details. Thus if your investments in the plan are earning more than 2% you lose out on those gains for your loan money. However, if the markets have a tumble and your retirement plan suffers, having the money set aside earning a set amount may work to your advantage. Next the payback money deducted from your paycheck will have loan interest charged to you. In your case you said it would be 4.25%. That interest is paid into your retirement funds. So if you think about it, you will only be paying double taxation on the interest not the amount you borrowed because the money was never withdrawn from the plan, just set aside. There are some informative articles at http://www.investopedia.com/articles/retirement/08/borrow-from-401k-loan.asp. You never stated why you need the loan. So, without a clear financial objective and plan in place - leave your retirement money alone. I hope this helps in your decision making. Good luck in your financial future.

Comment   |  Flag   |  Dec 05, 2014 from Carmel, IN

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