401k / 403b Withdrawal

2 Replies

I have been told that I cannot withdraw from my 403b plan unless I take a loan or am 59.5 years old (which I am not), even if I am willing to take the IRS penalty.  I was told, however, that if I were to take a loan and default, it would trigger a 1099, treating it as ordinary income, meaning pay the penalty plus related taxes.  When I questioned if that could affect my credit in any way, he said no because it was a loan to myself.  Has anyone considered or done this?  Are there any trip wires that I need to be cautious of ... other than "you have to consider the lost earnings if you withdraw your money, etc, etc."  I get all of that and I haven't made a decision, just getting all of the facts to determine if this is a viable option for me.  

@Karen Kasjaniuk

This was the strategy I used to use as a down payment for my SFR. To me, making a withdrawal from your 401K/403b plan is a foolhardy mistake. The amount of money you will lose is way too great. You will be taxed 3 ways (Federal, State, FICA) and still pay a 10% penalty? Not worth it.

A 401K/403b loan is a much better option. The key thing we need to know is if you plan on staying at your current job for the life of the loan. This is very important, because if you take out the loan and then a year later decide to leave your job, you will need to pay back whatever is left of the loan to the fund. If you don't it becomes ordinary income and will owe taxes on it.

So I will only suggest the loan if you plan on staying at your job for the life of the loan. And yes the gentleman you spoke is right, when you take out the loan from your retirement fund, its not reported to FICO, so you never get hit on your credit score. My credit score stayed the same even though I borrowed money from both my 401k and Pension plan.

Hope this help

@Karen Kasjaniuk

Correct that loan defaults stemming from 401k and 403b loans will not affect your personal credit.

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