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Should I Cash Out My 403b Account To Pay Off Debt?

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64.4K

Help a reader with this question:

I currently have a 403b with about $20k in it. I am planning on leaving my job late April and was previously planning on moving the money somewhere else. However, I owe a family member $15k for a car they bought me almost 5 years ago. I did not pay them back yet because we have been working on paying off all of our other debts (which we have paid them all off!), and the family member was not charging me interest or asking for the money back. So this $15k (and our mortgage) is the only thing holding us back from being debt free. Would it be wise to consider pulling the money out of the 403b when I leave my job, paying the taxes, and then giving my family member the money to pay off the debt? Then I was thinking about opening a Roth IRA with any remaining money since I think we can get down to owing the family member $10k by the time I leave my job.

Another factor which I need to look into is how my company has invested in my 403b. I am not fully vested since I will be about 7 months short of becoming fully vested so I am not sure if I will lose money from the 20k when I leave my job.

My Answer:

Regarding the 403b, I would NOT pull the money out of it to pay off the debt you owe the family member. The reason for this is because you will potentially pay a 35% penalty to withdraw the money early. The 403b will charge you a 10% penalty and then you’ll owe the IRS taxes on the withdrawal amount based on your current tax bracket which is probably 25%. So, would you borrow 15k at 35% interest to pay off the personal loan? No, I am sure you wouldn’t, so there’s no reason to use the money from the 403b.

When you leave the company, transfer the 403b money into a Roth IRA with a discount stock broker. I like Vanguard, Charles Schwab, and Etrade.com. You want to do a DIRECT transfer. This is very important, because if they cut a check to you, you cash the check, and put the money into another account, the IRS could hit you for the taxes. You want the money to go straight from the 403b provider to the new brokerage account. Whoever you choose will have instructions on what to do for a direct transfer.

I commend you for wanting to get out of debt quickly, and I think you still can, but the family member obviously isn’t hurting from that loan, so contact him or her and tell them you’ll start sending them money on a monthly basis. Who knows, maybe after 6 months of sending them money, they’ll forgive you for the rest of the loan. But, you definitely owe the money, so you should start putting together a repayment plan as part of your monthly budget to get the loan paid off as quickly as possible.

Erik Folgate
Erik and his wife, Lindzee, live in Orlando, Florida with a baby boy on the way. Erik works as an account manager for a marketing company, and considers counseling friends, family and the readers of Money Crashers his personal ministry to others. Erik became passionate about personal finance and helping others make wise financial decisions after racking up over $20k in credit card and student loan debt within the first two years of college.

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