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Should I partially cash out of my 403(b) retirement account? If yes, then what is the max I should cash out this year?

I have returned to school and have about $30,000 in a 403(b) retirement account.

I have a mortgage which is costing me 6.75% APR ($95,000) a second mortgage at 6% ($16,000) and borrowing money from family at 0.23% to pay for school. I would love to sell my property, but it is many $ underwater at the moment. I am current with all of that.

I, however, am not current with my unsecured debts, which amount to around $30,000 on face value. All have charged off and are in various states of being. I am in a great position to get these amounts negotiated down and settle these debts.

Because my new career requires a strong showing of financial responsibility due to its fiduciary nature, I need to show that I have taken care of these debts. Cashing out my 403(b) is one way I feel I can pay off these debts once and for all.

I am in the lowest tax bracket I will ever be in again because I am in school and only making ~$500/month. My potential for income increases 2-3 fold from my previous career when I graduate and get a job.

My 403(b) averages 6% growth per year. Student loans are at about 5.5%.

I cannot increase the amount I am borrowing from family.

Sep 15, 2013 by Jake from Knoxville, TN in  |  Flag
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4 votes

Tough question, Jake. Here's my summary of the facts: you have two large, long-term assets that you cannot liquidate without taking a financial hit. You have multiple large current liabilities and little income and no current savings. If your new career requires a strong showing of financial responsibility, it seems that you need to take some immediate and drastic action to get your financial house in order. First order of business is to start living within your means. You cannot continue to support your mortgage and eat on $500 a month, so get a second job (or third) and increase your income. Second, pay off as much debt as you can as quickly as possible. This may mean selling your stuff, including your house and/or retirement (which I generally do not advocate). You are in a tough spot, so some tough love is in order. There is no easy or quick way out of your situation. I recommend discussing with a reputable credit counseling agency in your area before your situation gets worse.

Comment   |  Flag   |  Sep 16, 2013 from River Hills, SC

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Pam is right on target here, and I do agree that your 403b should be your "last resort" to alleviate your debt situation. As you're upside down on your home value to mortgage ratio, consider looking into the HARP (Home Affordable Refinance Program). Also, make certain the credit counseling agency is a "non-profit"... they will work in your best interest as opposed to their own. Best of Luck... Rod

Comment   |  Flag   |  Sep 16, 2013 from Springfield, MO

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Jake, if you cash out your 403(b), even after low taxes and the 10% penalty, you won’t have enough to pay off but a portion of your unsecured debt.

Plus, it won’t help you any in your new career, because anyone doing a credit check will see all your charge-offs and late payments for the next 7 years. I don’t have an answer, but I don’t see cashing in your 403(b) which is creditor protected, as accomplishing anything other than getting some bill collectors off your back.

Comment   |  Flag   |  Sep 20, 2013 from Delray Beach, FL

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