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Borrowing Against 403b


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#1 syntax49

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Posted 04 June 2004 - 01:57 PM

The guy selling 403bs at my middle school (I'm a new teacher but 49 years old) suggests I could max out my contribution ($13,000 etc.) for a couple of years, draw from post-tax, being-taxed savings to make up my living expenses, then borrow against that 403b for home buying. Does this make sense?
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#2 FrenchTeacher

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Posted 04 June 2004 - 02:33 PM


I'm going to let more qualified financial minds than mine answer this fully, but I immediately smell trouble when a guy is recommending that you give him a vast portion of your money, then borrow against that to buy a home. Is the 403b company the beneficiary of the interest you'd pay on that loan, too? Be skeptical...be very skeptical.

On the flip side, some 403b's (such as mine) are set up so that interest you pay on a loan is credited back into your account, so you are in effect "paying yourself back" for the loan. The 403b company still gets to play with your money for a few years, though.



#3 Yanikoski

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Posted 04 June 2004 - 03:48 PM

If the choice is between putting the money into the 403(b) or else putting it into a home purchase, both are good options. What your 403b guy is proposing is that you can have the benefits of both.

If you make the 403b contribution, borrow against it, then pay it back, you restore the tax shelter when you pay back the loan. If you simply never contribute the money to your 403b, you cannot double up on contributions later to make up for it. So if you think you have will have enough cash flow, after you buy your house, to pay your mortgage, repay the 403b loan, plus continue to make maximum new 403b contributions, this plan could work out to your benefit.

The other advantage is that if you make a 403b contribution and then borrow it back, none of your money is going to Uncle Sam. If you don't make the 403b contribution, taxes will take a bite out of it before you get to apply the remainder to your home purchase.

But there are at least four caveats:
1) You will probably not be able to borrow your entire balance. If you already have money in the plan, that may be OK. But if it is a new account, you will be able to borrow only a portion of it back, so make sure you will actually have access to enough to support your home purchase.
2) Make sure you know how long a term you can borrow for. Some 403b providers will let you borrow for 30 years to buy a house, but many will not. The shorter the term, the higher the payments, and greater the strain on your cash flow.
3) You have to be quite sure of your cash flow. If you default on a 403b loan, the amount you default on is considered to be a distribution, subject to immediate taxation and, if you are not yet 59-1/2, a 10% tax penalty. If you defaulted, it probably means you were already in financial trouble, so having these additional taxes to pay can be a real killer.
4) I think that in all cases the interest you pay is credited to your account -- but MINUS some amount, usually about 1%. So you do pay something for use of the money.


#4 JMacDonald

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Posted 06 June 2004 - 09:31 AM

Hi,
I believe that there is another risk: if you lose or quit your job, the balance of the loan becomes due. I know I wouldn't take out a loan against my 403b. I feel it would be robbing from my future. Best Wishes.

Joe

#5 gadfly

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Posted 07 June 2004 - 06:22 AM

Then there is the unquantifiable little detail...human nature. You will probably never pay it back because you will always have other more pressing expenses. This is the provision of the 403b that I like the least. Another way to do this is to not link the two.

Save money for a house. When you are ready to purchase "play" with the interest rate. Take out a temporary buy-down to reduce payments or negotiate a higher interest rate so that you don't have closing costs. I don't like mixing the purchase of a home with saving ina 403b. Whenever you have middlemen, you incur expenses.

#6 fischermh

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Posted 07 June 2004 - 08:31 AM

Be careful, if you fall behind by two loan payments, the entire loan balance is taxable. Then you still need to repay the loan. Further, if you default, recordkeeping becomes an issue. If it is not done properly, you may end up paying taxes twice on the same money.

Mark Fischer, CFA