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Close A 403b


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#1 tinsnips11

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Posted 07 July 2009 - 09:36 AM

Hello,

I have a 3 part question: Can I close a 403b (our advisor whom I do not trust anymore says no) What are the tax ramifications? Can I offset some of the taxes with the loss?

I am scraping for a few extra grand for a down payment on a home. My wife is a teacher and besides her pension we have a 403b (w/ AXA) no match. There isn't too much money in there and we no longer contribute to it, but rather contribute to my matched 401k. I want to close the 403b.

Contributed = $7700 Actual Value = $6600 Loss = 1100?

we are on the upper bubble of the 15% tax bracket. State = 5.625, Are there any other fees from the IRS, Fund manager, etc? What is the timing? waiting periods? etc.

I understand this may not be the smartest thing to do. But I'm willing to take the hit to move my family into a better situation. If I'm willing to take the hit, it's my money why can't I close it?

thank you.

#2 tinsnips11

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Posted 07 July 2009 - 09:49 AM

Sorry, I neglected to say I did do search of the forum but didn't see a concrete answer.

BTW I am under 59-1/2

#3 sschullo

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Posted 07 July 2009 - 10:05 AM

QUOTE(tinsnips11 @ Jul 7 2009, 09:36 AM) View Post

Hello,

I have a 3 part question: Can I close a 403b (our advisor whom I do not trust anymore says no) What are the tax ramifications? Huge, beside the taxes will have to be paid, there is a 10% penalty for early withdrawl. But having said that you cannot simply withdraw it without, termination from employment, hardship, 59.5 years old. The 403b is not a savings account that one can jump in and out.

Can I offset some of the taxes with the loss? No. There are taxes owed since it is already taxed deferred.

I am scraping for a few extra grand for a down payment on a home. My wife is a teacher and besides her pension we have a 403b (w/ AXA) no match. There isn't too much money in there and we no longer contribute to it, but rather contribute to my matched 401k. I want to close the 403b.

Contributed = $7700 Actual Value = $6600 Loss = 1100?

we are on the upper bubble of the 15% tax bracket. State = 5.625, Are there any other fees from the IRS, Fund manager, etc? What is the timing? waiting periods? etc.

I understand this may not be the smartest thing to do. But I'm willing to take the hit to move my family into a better situation. If I'm willing to take the hit, it's my money why can't I close it? As I said above, 403bs are not made to jump in and jump out when you want the money.



BTW, this is what you are looking at and you should talk to your tax adviser for the exact figure. Even if you could withdrawl your money.

6600 times 15% = $990 in taxes
6600 times 10% fed penality for early withdrawl = $660

What you would finally get: 6600 - 1650 = $Approximately $4950.00. Using the orginal 7700, you would have a loss of 36%. AND you must subtract any surrender fees charged by AXA, if any.

Once again, ask your tax person about these figures. I am not a tax specialist.

Here is some unsolicited advice: DON'T DO THIS. For three reasons: 1. its costly and 2. when you are old and gray, this money will be there and 3, $6600 does not seem like a lot of money now, but it will grow depending on how far into the future you will need it for retirement. 70% of teachers have NO money saved in 403b.

If you cannot afford to purchase a home without this money, then perhaps, you are not ready to purchase that house now. In which case, lower you contributions to your 401k and save for a house purchase with after tax money in a money market account designed specifically for short term investing.

Good luck,
Steve


thank you.


#4 tony

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Posted 07 July 2009 - 10:14 AM

You might want to check out this website as it probably will answer your questions.

http://search.irs.go...amp;search.y=14


I also concur with Steve. You are basically going to throw a good portion of the the money away if you withdraw it.

#5 tinsnips11

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Posted 07 July 2009 - 10:54 AM

Thank you both.

We do have down payment. I was looking to scrape a little more to avoid the PMI.


I looked at the IRS 571 (#?) before I posted. I couldn't find anything on terminating.

I do know better than to screw with it. But the lack of service and limited release of information from AXA, low balance and no more elective contributions, combined with the optortunity to get a better Mortgage situation begged the question.

The 403b loss, taxes, and penalties would have to be equal to or less than the PMI payments over time. But then future gains would have to be factored in too... no?

In the end, I just needed somebody else to say it.

Thanks

#6 sschullo

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Posted 07 July 2009 - 12:40 PM

What is your mortage rate? and the PMI?

#7 tinsnips11

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Posted 07 July 2009 - 01:19 PM

QUOTE(sschullo @ Jul 7 2009, 01:40 PM) View Post

What is your mortage rate? and the PMI?



The Rate is 5.0 and PMI is $163 or 183 per month. I don't remember what the percent is on the PMI around .05% maybe. I have a call in to find out.

In the meantime I spoke with the local AXA administrator, who stated I cannot close it w/o a (documentable) hardship or upon termination. I understood (perhaps incorrectly) that after 2009, 403b's were more like 401k's and I could close it, or at least use it for purchase of a primary residence (still paying the 10% and taxes). Please enlighten me.

Thanks again.

#8 sschullo

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Posted 07 July 2009 - 01:55 PM

Hi again,
No you cannot "cash it out" until you have a distributional event (59.5, hardship, termination from employement). Having said that, you might not be opposed to transfering that money into a lower cost company such as Vanguard, TR Price, TIAA cREF or a Fidelity investment. I totally agree that AXA is an expensive company which will put a drag on performance and put more money in that adviser's pocket than yours.
Call your wife's district and ask for the plan document to see if any of the above companies are listed. If one or more are listed, you are in luck for a transfer.
Let us know what you find out,
Steve


#9 tinsnips11

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Posted 07 July 2009 - 02:33 PM

The PMI is less than .05% and will not be official until a property is selected, but based on the downpayment and our credit scores it will be less than that.

Its all a dead issue because we don't have a distributional event. Probably for the best as I was out-thinking myself.

I did ask about a roll over. They weren't too happy but said it was possible. Thanks for the tip.


Thanks for you time and attention. I'll probably post again when I get the list from the Town.

t

#10 sschullo

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Posted 07 July 2009 - 05:16 PM

QUOTE(tinsnips11 @ Jul 7 2009, 02:33 PM) View Post


I did ask about a roll over. They weren't too happy but said it was possible. Thanks for the tip.


You are welcome and get ready for an earful of self interested and self absorbed babble talk from that adviser.

#11 Vince

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Posted 09 July 2009 - 11:41 AM

*Throwing the tax book at you* Is this a first time home purchase? Your plan may allow for it to be used for a down payment. See the following:



(2)

(F) Distributions from certain plans for first home purchases

Distributions to an individual from an individual retirement plan which are qualified first-time homebuyer distributions (as defined in paragraph (8)). Distributions shall not be taken into account under the preceding sentence if such distributions are described in subparagraph (A), ©, (D), or (E) or to the extent paragraph (1) does not apply to such distributions by reason of subparagraph (B).


(8) Qualified first-time homebuyer distributions
For purposes of paragraph (2)(F)—
(A) In general
The term "qualified first-time homebuyer distribution" means any payment or distribution received by an individual to the extent such payment or distribution is used by the individual before the close of the 120th day after the day on which such payment or distribution is received to pay qualified acquisition costs with respect to a principal residence of a first-time homebuyer who is such individual, the spouse of such individual, or any child, grandchild, or ancestor of such individual or the individual's spouse.
(B) Lifetime dollar limitation
The aggregate amount of payments or distributions received by an individual which may be treated as qualified first-time homebuyer distributions for any taxable year shall not exceed the excess (if any) of—
(i) $10,000, over
(ii) the aggregate amounts treated as qualified first-time homebuyer distributions with respect to such individual for all prior taxable years.
© Qualified acquisition costs
For purposes of this paragraph, the term "qualified acquisition costs" means the costs of acquiring, constructing, or reconstructing a residence. Such term includes any usual or reasonable settlement, financing, or other closing costs.
(D) First-time homebuyer; other definitions
For purposes of this paragraph—
(i) First-time homebuyer The term "first-time homebuyer" means any individual if—
(I) such individual (and if married, such individual's spouse) had no present ownership interest in a principal residence during the 2-year period ending on the date of acquisition of the principal residence to which this paragraph applies, and
(II) subsection (h) or (k) of section 1034 [3] (as in effect on the day before the date of the enactment of this paragraph) did not suspend the running of any period of time specified in section 1034 [3] (as so in effect) with respect to such individual on the day before the date the distribution is applied pursuant to subparagraph (A).
(ii) Principal residence The term "principal residence" has the same meaning as when used in section 121.
(iii) Date of acquisition The term "date of acquisition" means the date—
(I) on which a binding contract to acquire the principal residence to which subparagraph (A) applies is entered into, or
(II) on which construction or reconstruction of such a principal residence is commenced.
(E) Special rule where delay in acquisition
If any distribution from any individual retirement plan fails to meet the requirements of subparagraph (A) solely by reason of a delay or cancellation of the purchase or construction of the residence, the amount of the distribution may be contributed to an individual retirement plan as provided in section 408 (d)(3)(A)(i) (determined by substituting "120th day" for "60th day" in such section), except that—
(i) section 408 (d)(3)(B) shall not be applied to such contribution, and
(ii) such amount shall not be taken into account in determining whether section 408 (d)(3)(B) applies to any other amount.




#12 TPA NY

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Posted 09 July 2009 - 01:02 PM

tinsnips11-

The “qualified first-time homebuyer distribution” applies to IRAs but you should have a documentable hardship for the “costs relating to the purchase of a principal residence” (see IRS’s Retirement Plans FAQs regarding Hardship Distributions @ www.irs.ustreas.gov/retirement/article/0,,id=162416,00.html). 403(b) plans typically follow the “safe harbor” requirements established by the IRS for 401 (k) plans unless stated otherwise in the sponsor’s 403(b) plan document.

Once you go into contract for the purchase of the home, you should have the necessary documentation that AXA would need with the hardship request form. The plan may require that a loan be taken first but you should be able to close the account (with hardship only or combo of loan/hardship) since the 403(b) currently has no earnings (account value is less than total contributions). If you are required to take the loan and you want to close out the account, please keep in mind that you’ll need to make sure that no repayments are made so the outstanding loan amount can go into default and become taxable.

Please note that with the AXA Equitable 403(b) product, you are typically subject to a 12-year contingent withdrawal charge schedule (6% in 1st 7 years/declining roughly 1% in each of the remaining 5 years). So the 6% withdrawal charge may be around $396 (6% ###### $6,600). The 10% excise tax and taxable income would be due or adjusted for on your tax return. If this is a first time home purchase made by 12/1/09 then the tax credit of up to $8,000 would hopefully make you forget about the income and excise tax due to this transaction.

-Phil


#13 elspouse

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Posted 12 July 2009 - 09:15 AM

I don't know about the specific of your provider's plan, but the IRC & regs do allow for a "loan" from the plan, usually capped at 50% of your total contributions balance or 50,000, whichever is less. You "repay" yourself, with the money being redeposited into the plan. I think the IRS allows up to 15 years to repay if the loan is taken to purchase a primary residence.

The loan disbursement is not a taxable event, but the payments are not deductible either (including the portion that is the "interest" you pay yourself). In effect, the interest gets taxed twice. But it's a way of avoiding the 10% penalty and withdrawing money when you do not qualify for a hardship withdrawal.

HTH