Im just wondering if it makes sense to do that since im basically borrowing from my own money..
2007-12-13 04:41:09 · 5 answers · asked by kakeydec 4 in Business & Finance ➔ Personal Finance
The problem with this is the money you borrow from the 403b will not be earning interest. You will pay it back but while it is gone from the account it will not earn interest. You will probably pay a little interest on the money you borrow but it will not match what you could have been earning.
Now, if you are invested in mutual funds and the market is in a downswing and you time things just right, you can actually preserve a bit of money by taking out a loan. However, the odds of that are pretty slim. If you knew exactly when to borrow to make this happen then you don't need a retirement account. You would be a Wall Street genius.
Another thing to consider is what would happen if you lose your job after you take out the loan. Under those circumstances you have a limited amount of time to pay back the loan (less than what the original term was) or else the IRS will consider the loan to be money withdrawn from the retirement account early and you will get hit with penalties and taxes.
It is usually best to only tap the 403b (or 401k) in extreme emergencies. You gain more growth from your money and you limit your exposure to possible tax penalties.
2007-12-13 04:48:25 · answer #1 · answered by A.Mercer 7 · 0⤊ 0⤋
Be aware that the money in your 403(b) account was deposited into the program tax free and is earning interest on a tax free basis. If you withdraw a portion of the funds, three things will happen:
1. You will no longer be earning interest or income on a tax free basis. This has a compounding effect and you will not be able to make up what you take out since you and your employer's contribution is limited by the law.
2. You will owe income tax on any money withdrawn NOW. If you want to take out $10,000 and your marginal tax rate for ordinary income is 28%, you will net $7,200. It doesn't make sense to take money out in your wage earning years when presumably you are in a higher marginal income tax bracket than you will be when you retire.
3. You will be subject to an early withdrawal penalty of 10%.
This plan doesn't make sense, especially if you are earning more on your investments than you are paying in interest on the note on your car.
2007-12-13 04:51:01 · answer #2 · answered by Brian C 2 · 0⤊ 0⤋
As well as the answers already given, you might be in a situation like me. That is, you don't have much savings, or else you would probably pay off your car anyway, since the interest on that is probably higher than the interest in a savings account. Since that's the case, this 403B might be good to keep as your emergency fund. Use it to pay off your car, and I don't know if your situation would leave you with other resources for emergency money.
2007-12-13 04:52:54 · answer #3 · answered by nevillepker 3 · 0⤊ 0⤋
No this is not a good idea. The reason is simple. While you borrow your money, you will not be earning interest on the withdrawal. You are better off keeping your wealth in place and keeping the car loan if the terms are favorable.
2007-12-13 04:44:56 · answer #4 · answered by Jay P 7 · 0⤊ 0⤋
your still paying interest - I can't imagine you're saving that much, plus you lose the income from not having the money in your 403B - bad idea
2007-12-13 05:13:21 · answer #5 · answered by Anonymous · 0⤊ 0⤋
No, don't do it.
2007-12-13 05:01:20 · answer #6 · answered by Anonymous · 0⤊ 0⤋