- It doesn’t affect your credit score. Your 403(b) loan is technically not a debt, so it doesn’t affect your credit score and your chances of getting approved for a traditional loan.
- You don’t have to return early withdrawal. If you cash out on your retirement savings, you don’t have to return the money to your account.
- You’re taxed twice essentially. Your loan repayment comes from your after-tax income, and then you pay full income tax when you get your distributions.
- You pay penalties and taxes when you default. If you default on the loan, you have to pay a 10 percent penalty plus income tax on your entire loan amount. Your early withdrawal is also considered an income and is therefore taxable.
- There’s an opportunity cost. Your retirement account is designed for long-term investments. Taking out loans and early withdrawals from it can stunt the growth of your assets.
Should You Borrow from Your 403(b)?
In general, you should not take money out of your 403(b). It’s not an emergency fund but an investment account that should grow over time to ensure your future financial stability. Taking out money makes you miss out on investment gains, and if you borrowed money when the market is down, you may not be able to recoup the losses.
Taking out a loan from your 403(b) retirement plan is quite similar to the usual loan application from other lenders. But with 403(b), there’s no credit check conducted and the process is rather quick.
You must secure a loan application form from your 403(b) plan provider, such as this one from Aspire. Your employer usually chooses the 403(b) provider but may allow payday loans in Rhode Island you to choose your own from a list of predetermined vendors.
Fill out the necessary details and submit the form. Some institutions process the request on the same day it was submitted. When it’s approved, the fund is sent via direct mail or bank transfer (depending on what you choose) the next business day. You can have your funds in a few days.
Alternative Ways You Can Pay Off Debt
It’s best not to take out money from your 403(b) retirement plan and if you really have to then use it as your last option. That way, you won’t lose the benefits of compounding interests that will help grow your assets. Other than taking out a retirement loan, you can explore alternative ways to pay off your debt. Here are some tips:
1. Create A Budget
It’s one of the basic financial tips, yet many people still ignore it and miss out on its benefits. When you set a spending plan, you know where your money goes, and you minimize unplanned expenses. You also reduce the instances of missed payments, which would otherwise incur penalties and interests.
2. Change Your Spending Habits
With a budget in place, you’ll see how much more you need or which expenses you can cut. You probably don’t need a latte from Starbucks every morning, or you can pack your lunch instead of eating out every day. Rethink your spending habits, and you’ll discover ways you can save extra bucks to pay off your debt.
3. Consolidate Your Debt
If you have multiple debts, you can check if your bank or credit union can help you consolidate them into one personal loan with lower interest. You may end up paying less money than you would with individual debt.
4. Use the Snowball Method
Pay the minimum amount due on all your accounts. Then, put the extra money you have on the account with the smallest balance. Once you’ve paid off that smallest account, put the money to the next account with the smallest balance. These little successes get you off on a good start and make you feel more motivated because you see that you’re making progress.