A 403b plan is a retirement plan set up for teachers and nonprofit employees. These plans differ from 401k plans and other retirement accounts in that they are only available to certain people, not the general population. Unlike many retirement plans, you cannot withdraw money from the plan to buy a home or use any proceeds toward the down payment of a new home.
You usually cannot withdraw money from your 403b plan to buy a home without a penalty. The IRS only allows penalty-free withdrawals from a 403b plan under limited circumstances. You may withdraw money once you reach age 59 1/2. You also may withdraw money if you are severed from employment, become disabled, encounter financial hardship, or are making a qualified reservist distribution. Other withdrawals prior to age 59 1/2 are subject to a 10 percent penalty. Roth 403b plans are sometimes offered, and different rules apply. You may withdraw contributions you made to a Roth 403b plan at any time without a penalty as long as the account has been open for at least five years. Earnings from a Roth 403 plan cannot be withdrawn before age 59 1/2 without incurring a penalty.
You may take a loan from the 403b plan if the plan is an annuity and if the plan administrator offers this option. A 403b plan tax-sheltered annuity may allow loans of up to 50 percent of the account balance up to a maximum loan amount of $50,000. This loan amount may be used for any reason, including the purchase of a home. There are no restrictions as to whether the purchase is a new home or a second home.
You must repay the loan. Loans normally must be repaid over five years. But, loans used to buy homes may be repaid over a longer period of time. If you fail to repay the loan, you subject yourself to an IRS penalty of 10 percent on the amount you fail to repay if you are under age 59 1/2. Additionally, you'll pay income tax on the money you fail to repay, because the IRS will re-characterize the loan as a distribution.
Only take a loan from your 403b plan if you are certain you will repay it. You should consider taking a loan from a bank or using another source of savings. Money taken from your 403b plan won't be earning interest in the account. If your repayment rate is less than the interest rate you're earning in the account, you are, in effect, losing money by taking the loan.
- "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007
- IRS: 403b Plans, Distributions and Rollovers
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