[Hjalmar]

Quick question: I am 63 and fully vested in my 403B. I thought I might pay off all my credit obligations, but found out my employer does not allow withdrawals or loans prior to termination. Why the limitation? Thanks for your help. Hjalmar

[tony]

I do not know why your plan doesn't while some others do. I do know it limits the employer's IRS paperwork and accountability. Under the new rules I think employers are more weary of possible accountability issues developing. Its much easier not to allow withdrawals before retirement or separation from service.

Not having to deal with this sort of thing is one reasonwhy so many school districts have gone with Third party administrators.


Having said that, I believe a 403b plan should not allow withdrawals to pay debts. Your 403b is not a bank. Its insurance that you can live out your retirement years and should be used for that purpose.



I don't mean to sound harsh but you should watch your spending as much as possible so unmanageable debts do not occur.


See if you can find other resources to help pay off your debts .


Tony

I do not know why your plan doesn't while some others do. I do know it limits the employer's IRS paperwork and accountability. Under the new rules I think employers are more weary of possible accountability issues developing. Its much easier not to allow withdrawals before retirement or separation from service.

Not having to deal with this sort of thing is one reasonwhy so many school districts have gone with Third party administrators.


Having said that, I believe a 403b plan should not allow withdrawals to pay debts. Your 403b is not a bank. Its insurance that you can live out your retirement years and should be used for that purpose.



I don't mean to sound harsh but you should watch your spending as much as possible so unmanageable debts do not occur.


See if you can find other resources to help pay off your debts .


Tony

[TPA NY]

Hjalmar-

Tony’s response to your inquiry is pretty good but I just want to give you some more information to why your employer may limit withdrawals or loans prior to termination. Before the new 403(b) regulations went into effect on 1/1/09, it was presumed that most 403(b) plans did not have a plan document (at least in the public school market). Absent of a written plan, 403(b) participants would be allowed to loans and hardship withdrawals (at any age) and in-service withdrawals after attaining age of 59½. Now that the new 403(b) regulations require plan sponsors to have a written plan by the end of 2009, it provided employers the opportunity to design their own plan. By prohibiting loans, hardships or any other in-service withdrawal, the employer is eliminating additional administrative work and expenses that would be necessary to accommodate these provisions. There’s nothing wrong with what they’re doing, it’s just probably different than the way it has been operated in the past.

-Phil

[intruder]

Quick question: I am 63 and fully vested in my 403B. I thought I might pay off all my credit obligations, but found out my employer does not allow withdrawals or loans prior to termination. Why the limitation? Thanks for your help. Hjalmar

There is no IRS requirement that a 403b plan offer either loans or inservice withdrawals.

Taking a loan from a 403b is not the bad thing that some posters believe because the interest rate will usually be lower (e.g. 2% over prime -5.25% v 10 to 20% on a cc), period of repayment is limited to 5 years instead of an infinite period in a revolving credit line, and the loan is equilvalent to an investment in a fixed rate security such as bond where the interest goes back to the participant's account. The risk on a plan loan is that loan balance becomes taxable when employment ends.

The problem is that after taking out the plan loan employees must stop using their other debt obligations by cutting up their cc and closing down bank lines of credit such as overdraft accounts to avoid increasing their debt.

[bigred]

Quick question: I am 63 and fully vested in my 403B. I thought I might pay off all my credit obligations, but found out my employer does not allow withdrawals or loans prior to termination. Why the limitation? Thanks for your help. Hjalmar

There is no IRS requirement that a 403b plan offer either loans or inservice withdrawals.

Taking a loan from a 403b is not the bad thing that some posters believe because the interest rate will usually be lower (e.g. 2% over prime -5.25% v 10 to 20% on a cc), period of repayment is limited to 5 years instead of an infinite period in a revolving credit line, and the loan is equilvalent to an investment in a fixed rate security such as bond where the interest goes back to the participant's account. The risk on a plan loan is that loan balance becomes taxable when employment ends.

The problem is that after taking out the plan loan employees must stop using their other debt obligations by cutting up their cc and closing down bank lines of credit such as overdraft accounts to avoid increasing their debt.

Mr Intruder,

Isn't it also a poor tax strategy because you have to put after-tax dollars back into the account to pay off the loan. Then when you take the money out in distributions you have to pay income taxes again on it. Assuming it is a traditional account.

[sschullo]

Quick question: I am 63 and fully vested in my 403B. I thought I might pay off all my credit obligations, but found out my employer does not allow withdrawals or loans prior to termination. Why the limitation? Thanks for your help. Hjalmar

There is no IRS requirement that a 403b plan offer either loans or inservice withdrawals.

Taking a loan from a 403b is not the bad thing that some posters believe because the interest rate will usually be lower (e.g. 2% over prime -5.25% v 10 to 20% on a cc), period of repayment is limited to 5 years instead of an infinite period in a revolving credit line, and the loan is equilvalent to an investment in a fixed rate security such as bond where the interest goes back to the participant's account. The risk on a plan loan is that loan balance becomes taxable when employment ends.

The problem is that after taking out the plan loan employees must stop using their other debt obligations by cutting up their cc and closing down bank lines of credit such as overdraft accounts to avoid increasing their debt.

Mr Intruder,

Isn't it also a poor tax strategy because you have to put after-tax dollars back into the account to pay off the loan. Then when you take the money out in distributions you have to pay income taxes again on it. Assuming it is a traditional account.

And there is one more little tiny disadvantage, money that is borrowed does not earn interest!

There are no free lunches, come on, 2% loan (The sales people don't tell you the rest, such as 2% over prime and all the other little details). If one can explain how it really is a lower interest loan than elsewhere and you understand the explanation, my hat is off to you.

Only do this as a last resort, but first you must control spending whether borrowing from a 403b or taking out any loan.

[intruder]

Quick question: I am 63 and fully vested in my 403B. I thought I might pay off all my credit obligations, but found out my employer does not allow withdrawals or loans prior to termination. Why the limitation? Thanks for your help. Hjalmar

There is no IRS requirement that a 403b plan offer either loans or inservice withdrawals.

Taking a loan from a 403b is not the bad thing that some posters believe because the interest rate will usually be lower (e.g. 2% over prime -5.25% v 10 to 20% on a cc), period of repayment is limited to 5 years instead of an infinite period in a revolving credit line, and the loan is equilvalent to an investment in a fixed rate security such as bond where the interest goes back to the participant's account. The risk on a plan loan is that loan balance becomes taxable when employment ends.

The problem is that after taking out the plan loan employees must stop using their other debt obligations by cutting up their cc and closing down bank lines of credit such as overdraft accounts to avoid increasing their debt.

Mr Intruder,

Isn't it also a poor tax strategy because you have to put after-tax dollars back into the account to pay off the loan. Then when you take the money out in distributions you have to pay income taxes again on it. Assuming it is a traditional account.

The question of whether it is a poor tax strategy is irrevalent because the employee would have to pay the personal loan back to the cc company with after tax money anyway. (And the $20,000 borrowed from the 403b plan must be repaid with AT money b/c the loan amount was not taxed as a distribution.)

The real savings is the interest expense saved by borrowing at a lower rate.

Example: outstanding cc balance of $20,000 at 15.75% annual interest w/ 5 year payoff = monthly payment of 483.71 or 60 payments totaling $29,022 of which $9022 is interest expense.

same $20,000 balance @ 5.75% w/5 year payoff = $384.34 monthly payment times 60 totaling $23,060 for a savings of $5,962 in interest expense ($9022-3060). The $99 a month savings in interest expense would yield $433 if invested at 5% for 5 years which when added to the $5,962 interest savings yields a total benefit of $6,395 over paying back the loan with a higher cc rate.

[intruder]

Quick question: I am 63 and fully vested in my 403B. I thought I might pay off all my credit obligations, but found out my employer does not allow withdrawals or loans prior to termination. Why the limitation? Thanks for your help. Hjalmar

There is no IRS requirement that a 403b plan offer either loans or inservice withdrawals.

Taking a loan from a 403b is not the bad thing that some posters believe because the interest rate will usually be lower (e.g. 2% over prime -5.25% v 10 to 20% on a cc), period of repayment is limited to 5 years instead of an infinite period in a revolving credit line, and the loan is equilvalent to an investment in a fixed rate security such as bond where the interest goes back to the participant's account. The risk on a plan loan is that loan balance becomes taxable when employment ends.

The problem is that after taking out the plan loan employees must stop using their other debt obligations by cutting up their cc and closing down bank lines of credit such as overdraft accounts to avoid increasing their debt.

Mr Intruder,

Isn't it also a poor tax strategy because you have to put after-tax dollars back into the account to pay off the loan. Then when you take the money out in distributions you have to pay income taxes again on it. Assuming it is a traditional account.

And there is one more little tiny disadvantage, money that is borrowed does not earn interest!

There are no free lunches, come on, 2% loan (The sales people don't tell you the rest, such as 2% over prime and all the other little details). If one can explain how it really is a lower interest loan than elsewhere and you understand the explanation, my hat is off to you.

Only do this as a last resort, but first you must control spending whether borrowing from a 403b or taking out any loan.

Steve:

There are no sales men selling loans in an employer retirement plan because the plan doesn't profit from the loan since it is a tax exempt organization, not a bank. Most plans/tpas only charge an admin fee of $75-100 to process the loan. Maybe you know something about loans in public plans that doesn't exist in private retirement plans that you can tell us. Doesn't CALstrs have a loan provision in its 403b plan?
For plans subject to ERISA interest rates must bear a reasonable rate of interest which is defined in DOL regulations as a return commensurate with the interest rates charged by persons in the business of lending money for loans which would be made under similar circumstances. The general convention is to charge a rate of interest 1 to 2% over prime which has not been questioned by the DOL.

Also while the money borrowed does not earn interest, the interest payments are deposited to the employee's account along with the principal.

Perhaps you should get a job and join a 401k plan to see what the loan rates are.

[sschullo]

Quick question: I am 63 and fully vested in my 403B. I thought I might pay off all my credit obligations, but found out my employer does not allow withdrawals or loans prior to termination. Why the limitation? Thanks for your help. Hjalmar

More information about 403b loans. Get informed before you borrow from your 403b. click here
Good luck,
Steve