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Louis B

403b Transfer To Ira

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I am currently employed in a school system that has switched 403B vendors. My previously accumulated assets are still in an account with the old vendor. Do I have to transfer these assets to the new vendor? I would like to move them to an outside vendor and into an IRA. What is the rule on this?

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Guest Chuck Yanikoski

No, you don't have to move your old assets to the new vendor. Any new contributions will have to go to the new vendor (assuming the employer will no longer send them to the old vendor), but you may transfer them out periodically to the old vendor if you want (though watch out for any charges the new vendor might want to impose for early withdrawal).

 

You may not roll the funds over into an IRA unless you have a "distributable event" -- usually separation from service, unless you are already age 55 or older. Getting a new vendor is not such an event, so unless you are 55+, you cannot make that kind of change yet.

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Guest Joel

Louis,

 

A 403b distribution may not be made without meeting one of the following events: 1. Separation From Service, 2. attainment of age 59.5 if still employed, 3. Disabiltiy, 4. Financial Hardship and 5. Death. So you may not rollover your 403b from the old vendor to an IRA before satisfying one of these triggering or distributable events. Please note that a distribution on account of Financial Hardship does not qualify for rollover treatment.

 

The age 55 rule states that if you separate from employment during or after the year you attain age 55 any distributions you effectuate from a 403b arrangement will not be subject to the 10 percent penalty tax.

 

Peace and Hope,

Joel

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Guest stephanie

If I have money in a 403b and want to access it for a down payment on a house, but don't meet the age or other distribution requirements, can I get my money out? Can I roll it into an IRA and then withdraw it? I'm in NYC and need some help, please!

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Guest Joel

An employee must be age 59.5 in order to make an in-service taxable withdrawal. Thus, in order to rollover to an IRA an employee must attain age 59.5. But if you were age 59.5 you would simply effectuate a withdrawal in order to access the money to help with the down payment.

 

I LOVE NYC...BUT THE LOCALE HAS NOTHING TO DO WITH THE FEDERAL TAX CODE WHICH GOVERNS.

 

Peace and Hope,

Joel L. Frank

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Guest stephanie

I didn't know it was federal tax code! Apologies.

 

There's no way to get my money out if I'm not age 59.5 or older?

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Guest Chuck Yanikoski

You may well be eligible for a loan. Most annuity-funded plans, and some mutual funds, permit loans against a 403(b) account. Some will permit loans for up to 30-year terms, though many require repayment within 10 years (or, more rarely, 5 years). Ask your product representative or plan administrator.

Such loans are permitted by law and are not considered a withdrawal, and so are not subject to the usual age rules. However, if you default on the loan your outstanding balance WILL be considered a withdrawal, and it is then not only subject to income taxes, but it is also subject to a 10% tax penalty if you are not yet eligible for withdrawals. So don't take such a loan unless you are highly confident that you will be able to meet its terms.

In the short run, however, a loan is better than a withdrawal, because it is NOT subject to taxes. If you need, say, $20,000, then that's all you have to borrow. If you made a withdrawal, you would probably have to take out more like $30,000 in order to pay your federal and state taxes and still have $20,000 left. By the same token, of course, your loan repayments will come out of your AFTER-tax earnings; they are not excludible from income the way regular 403(b) contributions are.

You also have to pay interest on the loan, but at the same time, your 403(b) account will be credited with loan interest income -- though at a somewhat lower amount. You are, in effect, borrowing from yourself, with the financial company taking out a small slice for its trouble. The interest your 403(b) account receives is not currently taxable, nor is the interest you pay tax deductible, because it is not, technically, a mortgage. Your house does not secure the loan; your 403(b) account secures it.

Check it out...

 

 

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Guest Joel

The scenario Chuck describes all hinges on whether or not the bank will still give you a mortgage when they know you will have very little if any equity in the property at the time of closing.

 

Peace,

Joel

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Guest stephanie

Thank you both for your input, I appreciate it. I think I can swing this without having to take a loan against my 403b, it'll be tight, but do-able. Also, I've learned that any savings I see after buying an apartment (over the long haul, I mean) will go into a some other kind of account that I can access if I have to. What kind of account remains to be seen.

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Guest Chuck Yanikoski

For what it's worth, the bank may have an interest in 403(b) loans, but it is not a matter of equity. The mortagee's equity in the home is the same, regardless of whether the money came from a 403(b) or from a bank account. The 403(b) plan does not have any claim on the home.

However, the bank may be concerned about whether the mortgagee's earnings are sufficient to cover both the mortgage and the 403(b) loan repayments. So Joel is certainly right that this technique will, in some cases, jeopardize the ability to get a mortgage.

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