borrowing against 403b

[Poisson]

What is the name of your state? CA (previously UT)

I have debt issues that I am working through. A lot of my other questions where posted on another forum, but i had a question. ONe credit card company that Ihave been contacted by collections told me that if I pay $1100 now and $1000 in a month, they will forgive the remaining $900 dollars and my account will be paid in full. Sounds good, except, I don't have $1000 to pay. (The other option is that if I don't pay, they will work out a realistic payment plan.) I want to just do the $1000 and be done with it so I can focus my financial problems else where. I have about $10,000 in a 403b from my last job. Can I borrow against it? I didn't want to touch it, but I am young (26) and single and at this point don't have a lot of worries and would like to clear this all up before I end up with a family etc. Also, I have one other credit card company I have yet to talk to, and when I do, I will probably arranged a similar payment situation, with a down payment and monthly payments.

Mostly I wanted to know about borrowing against the 403b and what I need to be aware when doing so.

 

[cbg]

I can't say definitely yes or no, because it depends on your plan document. Some tax-deferred plans allow for loans; some do not. I'm talking about a loan that has to be repaid; you CANNOT make a withdrawal for this purpose.

IF your plan document does permit loans, here are some of the things to be aware of:

1.) Even though it is your own money you are borrowing, there will quite likely be interest you will have to pay. Although I can't guarantee it, in my experience it will likely be at the prime rate plus one percent.

2.) You MUST repay the loan according to the terms and conditions spelled out in the plan document. Make certain that you understand them BEFORE you sign on the dotted line. It will almost certainly be done through payroll deduction.

3.) If your employment is terminated for any reason (including a voluntary quit) any balance left on the loan becomes immediately due. ("Immediately" does not necessarily mean the next day - anywhere between 30 and 90 days is possible.) Failure to repay within the time frame allotted will mean that the loan is treated as a disbursement; you will need to pay taxes AND penalties on the balance of the loan the next time you pay your taxes.

 

[d8ddysgirl]

Also if you take a hardship loan on your 403B you can not contribute for 6 months into it. The IRS calls it a immediate and heavy financial need.

Also the stipulations on borrowing on a 403B are as follows:

Expenses for medical care incurred by myself, spouse or dependents.

Cost directly related to the purchase of my principal residence.

Payment of tuition realated educational fees and room and baord expenses for the next 12 months of post secondary education for myself, spouse or children.

Payments necessary to prevent eviction from my principal resisdence or foreclosure on the mortgage of said residence.

So I would not tell them you have a 1,000 credit card bill. Honestly do the payment plan.

 

[cbg]

"Also if you take a hardship loan on your 403B you can not contribute for 6 months into it." That is also dependent on the plan document. Some plans say six months; some say a year; some don't limit your contribution at all (although most do to some degree).

You can take a LOAN for any reason (at least as far as the IRS is concerned; company policy may limit it). A WITHDRAWAL is limited to the reasons you described.

 

[DrewfromCA]

The best thing to do.....

Since you are no longer at that job(since you referred to it as your last job, I assume you are not there anymore), you cannot take a loan from the account. Since you are separated from service, you can take a lump sum payment of the proceeds, which you should do at this point, and they will withhold a mandatory 20%(plus state) in federal withholding since this was a "pension" plan.
Realize you will have to pay a 10% IRS penalty on the amount since you are under 59 1/2, but you will need to just suck that one up. Also, make sure you report and pay that penalty on your 2004 tax return.

Take all the funds that you receive, and pay off every single bill that you possibly can(whether you pay entire amounts, or settlement amounts, just make sure they are cleared).

You may not want to do this right now, but I will tell you something that no one told me early in life. A good credit rating can save you many, many thousands of dollars in interest on car loans, home loans, etc. It is much more important to have your bills paid than having $10k in your 403b.

Finally, make sure you don't spend more than you make, and don't get into debt anymore, and your credit rating should be just fine within about 2-3 years of paying bills on time.