Jump to content
Sign in to follow this  
Meadow6

403b Withdraw

Recommended Posts

Here is the story about the Loan Defaults.

 

Let's say you take a loan for $10,000. and your 50 years old. You default on the loan. That year you will get a 1099R for the $10,000.

 

That $10,000. will continue to accrue interest until you reach a distributable event. for example - 591/2. At 591/2 your defaulted loan with be reclassified as a withdrawal and you will be sent another 1099R for the 9+ years of unpaid interest.

 

I confirmed this with two separate Insurance companies this morning.

 

Imagine the accrued interest build up on a client who is age 30 and defaults on a loan!

Share this post


Link to post
Share on other sites

Scotty,

 

You're right that it is a bit complicated, and it took me a while to figure out what you meant by "replacing" money. But realistically, consider the following:

 

I borrow $20,000 from my account, and then purchase a car with that money. In the end, I have to pay back that loan with money that indeed has already been taxed. I can't simply "replace" the $20,000 with the car!

 

Thanks for your perspective, though. It's always good to hear different ways of looking at things, even (or especially) if one disagrees with them.

Share this post


Link to post
Share on other sites

Thanks, Scotty, for defending my math.

 

The reality is that (ignoring interest for now) there is always an even number of transactions. Half are pre-tax, and half are after-tax. If you never make a loan, your contributions are pre-tax, your withdrawals are after-tax. If you make one loan, you contribution is pre-tax, your loan is pre-tax, your loan repayment is after-tax, and your withdrawal is after-tax. If you make multiple sequential loans, the same pattern holds: half the transactions are always pre-tax, half are always after-tax. The taxation therefore is always fair (favorably, actually) overall, regardless of whether a loan is taken, or how often.

 

I agree that interest is a different story. But most bank and other loans also involve only after-tax interest payments. Home equity loans are the main exception, but just as it is not always smart to borrow against your 403(b), it is not always smart to borrow against your house, especially for non-house-related expenses (though, yes, I've done that, too -- hey, I've got a daughter in college!).

 

I am not really plumping for people to borrow against their 403(b) plans. In general, I would encourage people to avoid it where they can. But we should keep our advice to valid reasons for restraint, and skip the specious ones.

 

Perhaps we should also acknowledge that there is a political issue here. Most of the low-cost vendors don't offer loans on 403(b) plans, so it is convenient for those who believe that the low-cost vendors are always on the side of the angels if loans are somehow evil. But loans are not evil, and the option to use them is a good thing for many people, just as the option to take a home equity loan is a good thing for many people -- though all the better if you never need to do it.

 

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

×
×
  • Create New...