Comments on: Should I Cash Out My 403b Account To Pay Off Debt? http://www.moneycrashers.com/should-i-cash-out-my-403b-account-to-pay-off-debt/ Personal Finance Blog, Your Guide to Financial Fitness Fri, 10 Feb 2012 01:50:00 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Dave68http://www.moneycrashers.com/should-i-cash-out-my-403b-account-to-pay-off-debt/#comment-34368 Dave68 Tue, 13 Dec 2011 01:39:00 +0000 http://www.moneycrashers.com/?p=1381#comment-34368 You need to pay your debt to the family member you have a moral obligation to do so regardless of how much taxes you have to pay! What you are doing is wrong and you are taking advantage of a family member who was nice enough to loan you the money @ 0%. You need to pay your debt to the family member you have a moral obligation to do so regardless of how much taxes you have to pay! What you are doing is wrong and you are taking advantage of a family member who was nice enough to loan you the money @ 0%.

]]> By: Britt (Your Roth IRA)http://www.moneycrashers.com/should-i-cash-out-my-403b-account-to-pay-off-debt/#comment-7105 Britt (Your Roth IRA) Thu, 19 Nov 2009 21:12:39 +0000 http://www.moneycrashers.com/?p=1381#comment-7105 That's exceptionally good advice. The taxes and penalties make it unwise to cash out of the 403b. But compounding the problem is the lost opportunity cost of compounding those funds tax-free in a retirement account for the day when you really need it. As Michael Harr points out, you've already managed to pay off your other debts. Take the funds you've been using to pay those debts and direct them toward the $15,000. Since no interest is being charged, there's no financial gain incurred by paying off the debt early. In fact, through taxes, penalties, and lost retirement planning years, it's just the opposite. Rollover into a Roth IRA, and find a cheap index fund for your $20,000. Then, forget about it and focus on paying off your debt through hard work. That’s exceptionally good advice.

The taxes and penalties make it unwise to cash out of the 403b. But compounding the problem is the lost opportunity cost of compounding those funds tax-free in a retirement account for the day when you really need it.

As Michael Harr points out, you’ve already managed to pay off your other debts. Take the funds you’ve been using to pay those debts and direct them toward the $15,000. Since no interest is being charged, there’s no financial gain incurred by paying off the debt early. In fact, through taxes, penalties, and lost retirement planning years, it’s just the opposite. Rollover into a Roth IRA, and find a cheap index fund for your $20,000. Then, forget about it and focus on paying off your debt through hard work.

]]> By: Michael Harr @ TodayForwardhttp://www.moneycrashers.com/should-i-cash-out-my-403b-account-to-pay-off-debt/#comment-7102 Michael Harr @ TodayForward Thu, 19 Nov 2009 05:19:23 +0000 http://www.moneycrashers.com/?p=1381#comment-7102 A couple of quick points. First off, this is sound advice. If you were able to repay other debts, then you're on the right track and paying off the last $15k shouldn't be a big deal. On the advice to do a direct transfer, this would technically be called a rollover and while it would be smart to put the money into a Roth IRA, this would trigger a significant tax, as the entire amount in the 403b would become taxable for the tax year in which the money came out of the 403b. If you choose to convert to a Roth, do it next year so you can spread the tax burden over 2011-12. Also, be careful about the provisions within the specific 403b plan that you are participating in. Many, MANY 403b plans have serious surrender charge as they are often sold as annuities. A surrender charge is imposed by the annuity provider (a life insurance company) and I've seen them well into the teens depending on how old the contract is. A quick recap: 1. Determine if your 403b has surrender charges 2. Decide if you want to roll it over into a traditional/rollover IRA or a Roth IRA. With the traditional/rollover IRA, there's no taxes and no penalties, with the Roth IRA, you pay taxes, but no penalties 3. If you do the Roth, postpone it until 2010. 4. Invest it wisely On #4, it sounds like you may not have a large enough emergency fund, so you might want to keep the money in cash until you're out of debt and have a significant amount in cash reserves. No need to add market ups and downs to your current situation or this brutal economy. A couple of quick points. First off, this is sound advice. If you were able to repay other debts, then you’re on the right track and paying off the last $15k shouldn’t be a big deal.

On the advice to do a direct transfer, this would technically be called a rollover and while it would be smart to put the money into a Roth IRA, this would trigger a significant tax, as the entire amount in the 403b would become taxable for the tax year in which the money came out of the 403b. If you choose to convert to a Roth, do it next year so you can spread the tax burden over 2011-12.

Also, be careful about the provisions within the specific 403b plan that you are participating in. Many, MANY 403b plans have serious surrender charge as they are often sold as annuities. A surrender charge is imposed by the annuity provider (a life insurance company) and I’ve seen them well into the teens depending on how old the contract is.

A quick recap:

1. Determine if your 403b has surrender charges
2. Decide if you want to roll it over into a traditional/rollover IRA or a Roth IRA. With the traditional/rollover IRA, there’s no taxes and no penalties, with the Roth IRA, you pay taxes, but no penalties
3. If you do the Roth, postpone it until 2010.
4. Invest it wisely

On #4, it sounds like you may not have a large enough emergency fund, so you might want to keep the money in cash until you’re out of debt and have a significant amount in cash reserves. No need to add market ups and downs to your current situation or this brutal economy.

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