Maybe you’re struggling with debt right now. Maybe you’re just annoyed with the high interest-rate your credit card provider charges you every year, so you want to pay off your debt. Then you remember you have a 403(b) retirement account and the money is just sitting there. Better to take advantage of it, you think?
“Can I take money out of my 403(b) to pay off debt?” The short answer is yes. But is it worth it? Should you even do it? Let’s explore that in this article.
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403(b) Loan Vs. Withdrawal: What’s the Difference?
There are two ways you can get money out of your 403(b) retirement plan: loan or withdrawal. The loan must be paid back to your retirement account and is not taxed as long as you keep up with the repayment.
You can withdraw from your 403(b) retirement account when you reach 59 ? years old without penalties. However, an early withdrawal before that age is subject to a 10 percent income tax of the amount withdrawn. Retirement withdrawals are considered income because the contributions and growth are tax-deferred.
You can also take a hardship withdrawal when you have a dire need for financial support and you can prove your case. In that case, the loan is limited to the amount that would satisfy your financial need. What circumstances are acceptable depend on the plan. For example, your 403(b) plan must specify that hardship withdrawals are allowed for medical expenses and funeral costs only. Big purchases, such as a home, or education expenses are not valid criteria. Your employer will determine if your dire financial needs are valid based on facts and circumstances.
You can borrow up to 50 percent of your retirement account balance or a maximum of $50,000, whichever is lower. However, if the balance is less than $10,000, you can borrow up to $10,000.
You have five years to repay the amount you borrowed plus interest. If you use the loan for education and home improvement, you’ll have longer repayment terms up to 15 years. The interest rate is typically the current prime rate when you took the loan, plus 1 percent. The payment schedule is every quarter. Here’s a calculator you can use to compute the true cost of your retirement loan.
If you can’t pay the loan within the allotted period, it will be treated as an early withdrawal, which means you’ll have to pay 10 percent income tax of the amount you borrowed as a penalty. If you missed one payment schedule, your loan will be considered as distribution, so you need to pay the penalty to the IRS when you filed your income tax for the year.
Can you pay off a 403(b) loan early? Definitely. You can pay your loan in a lump sum if you’re able. And there’s no penalty if you do so.
Weigh In: The Pros and Cons of Borrowing from 403(b)
Loans and withdrawals both have pros and cons. To decide which option is best for you, you must weigh these up.. Let’s take a look at what it entails to borrow or cash out from your 403(b) retirement account.
- It’s easy to obtain. The process is relatively easy compared to getting a loan from other lenders that have stringent requirements and paperwork. So, if you need money immediately, a 403(b) loan or withdrawal is a quick source.
- It has a low-interest ratepared to what you pay credit cards, 403(b) loan interests are up to 70 percent lower. If you’re refinancing credit card debt, this is a good option.