Author Topic: Rolling over a 403(b) for cash out?  (Read 6036 times)

Offline WakingUp

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Rolling over a 403(b) for cash out?
« on: December 09, 2012, 11:07:29 PM »
Hey all, I recently left a job for a new company and have to figure out what to do with my 403(b). I’ve been contributing for around 5 years and have just a little less than a year’s worth of salary built up. By no means a fortune, but a significant chunk of change. I’m 33 years old and admit upfront that I’m regrettably ignorant in the world of finance. I’m learning slowly, but find myself in need of some guidance that is above my pay grade, so to speak. I’m sure this goes without saying, but I recognize that any advice I receive on this thread is strictly opinion and no one on this forum is responsible for the decisions I make regarding my financial future but me. Ok, with legal bases covered, lets move on.

My wife and I currently have a moderate amount of credit card debt (significantly less than the value of the net 403b cash out), student loan debt (combined, significantly more than the net cash out) and a home mortgage. We don’t have any significant savings built up yet, but we try to put a little away every paycheck. Our plan is to move into a very small home on some family land in the next few months, rent free, and complete a larger home that my father never quite finished. As soon as we move out to the land we plan on selling the house we currently own, which will give us nearly $900 relief on our current monthly debt. I should add that my personal student loan debt is $250 a month and the payoff is roughly equivalent to the net payout on the 403b.

My main question is this: Is it wiser to use the funds to pay off our credit card debt and use the remainder as the start up for our emergency fund, or should we use the funds to pay off my student loan and then use the $250 a month to snowball the other debts and sock away more in our savings? Or is it smarter to ignore my lizard brain that tells me there’s no way in hell I will ever see that money at my retirement and just leave it in an IRA and hope for the best? Granted, we don’t have any other retirement built up, but I have absolutely no faith that any of that money will be there when I am eligible to withdraw it without penalty. Again, I admit my shortcomings regarding my financial education and would like to hear from others that understand this stuff better than I. Is there another angle I should be considering that I’m overlooking?

Thanks in advance for the info and opinions.

Offline Jack Crabb

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Re: Rolling over a 403(b) for cash out?
« Reply #1 on: December 10, 2012, 08:54:49 AM »
Vanguard Index Trust 500 rollover IRA and forget about it.

Offline fred.greek

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Re: Rolling over a 403(b) for cash out?
« Reply #2 on: December 10, 2012, 09:50:04 AM »
Is there some parcel of land out there you would like to hold as a retirement investment… If you can roll out your account, run a web search for “real estate IRA”. 

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Re: Rolling over a 403(b) for cash out?
« Reply #3 on: December 10, 2012, 09:58:36 AM »
What are you planning on doing when you retire?  Do you think social security will be there for you?  Do you think you'll be able to collect a pension from a future employer?

While it might be nice to retire some debt today and that's certainly not the worst thing you could do with the money, rolling it over into a IRA you can control would probably be the wisest move.  While there is a chance taxes will go up in the future, you are guaranteeing a loss to capital gains and IRS penalties for withdrawing retirement money now.  If you haven't thought much about retirement, just think about one thing:  If you do everything right between now and retirement (pay off a home with off-grid utilities and producing 100% of your food), what are you going to do to pay the property taxes, pay for transportation or cover healthcare costs?  Saving for retirement still makes sense.  What doesn't make sense is those folks who put away everything for tomorrow without any thought about savings outside their IRAs.

Start a rollover with a big name mutual fund company, diversify into three to a half-dozen or so funds with different strategies with a good cash option (or short term bond/money market fund) and tuck at least 33% in that part just to help you sleep at night.

Offline chrisdfw

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Re: Rolling over a 403(b) for cash out?
« Reply #4 on: December 10, 2012, 10:45:37 AM »
Be careful on any advice you take regarding alternative investments in real estate in an IRA, it is easy to mess up. I have a friend who specializes in this area, and know quite a bit about it myself. I've heard the horror stories about what happens if you get caught violating the self dealing rules, illegal contributions, etc. It can be done right, but get some professional help, not google searches. If you want to learn, Pensco trust has good resources, and my friend personally vouches for the guy that runs it, he'll turn down your business rather than let you run afoul of the law.

That said, sometimes we thing in too much of a binary fashion.. its either liquidate the 403b, roll it over, leave it. Sometimes (often) the best answer is to cash out some of it and roll over the rest. Maybe just enough to pay off the high interest credit cards? You can roll over some and cash out some. Try to view decisions as less of a binary choice and consider more options in between. Should I sell my gold? Maybe you ought to sell 40%, not all or nothing, etc.

An all or nothing approach might not be the best one. Get a CPA or CFP (fee only, not someone who makes commisions off selling financial products) to help you if you aren't prepared to make the decision alone or need some help.


Offline bigbear

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Re: Rolling over a 403(b) for cash out?
« Reply #5 on: December 10, 2012, 11:25:03 AM »
DO NOT roll it to your new employers retirement plan.  If you do, you will have to follow whatever distribution rules that are in place for that plan while you're still employed (specifically, you may not be eligible to take a distribution randomly while you're employed).

I'd say roll it over to an IRA with an online broker (like Scottrade, E*trade, etc).  Especially if you have to take 100% of your money from you prior 403b (i.e. no partial distributions when you're no longer working there). 

Then you can pick and choose what path to follow with the least amount of strings attached.  You'll still have to pay taxes and penalties once you sell it out of the tax shelter (whether it's a 403b, 401k, IRA...) and that will be considered taxable income when it comes to tax season too.

I'd consider paying off the credit cards as long as you have changed your lifestyle so that you don't replace the old debts with new debt.  That includes not going into new debt for the fix-me-up house.  But paying of credit cards will free up some cash each month.

Make sure to reassess EVERYTHING once you reach a financial landmark (like selling your house or paying off a debt).  $900/month can go a long way, so you'll need to know where it goes when it's not being paid to the bank each month!  So if you sell your house, then you need a plan to build toward your next goal.

Offline WakingUp

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Re: Rolling over a 403(b) for cash out?
« Reply #6 on: December 13, 2012, 06:51:23 PM »
What are you planning on doing when you retire?  Do you think social security will be there for you?  Do you think you'll be able to collect a pension from a future employer?

First lemme say thanks to everyone who took the time to reply and offer some sound advice. I still have tons of research to do before I decide which option is right for me. Fortunately, I don't have to do anything with my current investment package at the moment; I can leave it with my former employer and wait until I understand investing a bit more before I make any decisions. I'd say I've made the best decision I could at present; joined the forum and exposed my ignorance in order to gain a little wisdom from others.  I'm a little less eager to cash out now, and while I don't like the idea of not having the ability to actually USE my money immediately, I guess sometimes two birds in the bush can be better than one in the hand, especially if they're mating. :)

As for my retirement plans, I hope to "retire" from my current career within the next 10 years in order to pursue my passion - permaculture and spreading the virtues of healthy eating and sustainable living. I am working, albeit slowly, towards becoming a private consultant in this area and creating a business in an area that is severely under-served. I feel that the opportunity is definitely there; my co-workers are constantly lamenting about how food is no longer food and wondering what they can do to eat better and be less reliant on a failing system. When I bring up these things that are quickly becoming my obsessions, people approach me with more interest and curiosity rather than labeling me as a "doomsday prepper" and fanatic, and that gives me hope for making my dream a reality. It gives me hope that someday I will actually leave behind the timeclock and work towards showing people what it actually means to live like a human. To me, that is retirement.

I have no illusions about social security; if I receive anything at all it will be a pittance by any standard. And with my limited understanding of the financial market, I fear that the systems will fall apart to the point that any money I have in the current system will be absorbed by a corrupt government, stolen or just lost in a massive crash. In short, I really don't expect to get any of that 403(b) in 30 years. Hopefully I will be pleasantly surprised and have some extra play money in my waning years. But honestly, I want to die in my garden, working hard until my body just says "ok, enough bub." Then my kids can chuck me in the compost heap and let me stay in the garden a bit longer.  ;D

Offline FrugalFannie

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Re: Rolling over a 403(b) for cash out?
« Reply #7 on: December 14, 2012, 05:30:45 AM »
Is there some parcel of land out there you would like to hold as a retirement investment… If you can roll out your account, run a web search for “real estate IRA”.

You cannot own personal real estate in your IRA. You can invest in real estate through your IRA but it would be more in the form of a loan to some 'company', in which you can not be an owner, that invests in real estate or in the purchasing of shares of a REIT. So your brother could have a company that buys a investment property and you could loan him money on it (you may need to be further removed from the owner check with IRS rules). Loan docs would need to be drawn up. Yes I have done this. The money goes from your 403b to your 'self directed IRA' (Equity Trust is one of these companies) and when they get the paperwork from the 'company' you are loaning money to they will send them the money. They are the custodian of the money.

Offline chrisdfw

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Re: Rolling over a 403(b) for cash out?
« Reply #8 on: December 14, 2012, 07:31:49 AM »
You cannot own personal real estate in your IRA. You can invest in real estate through your IRA but it would be more in the form of a loan to some 'company', in which you can not be an owner, that invests in real estate or in the purchasing of shares of a REIT. So your brother could have a company that buys a investment property and you could loan him money on it (you may need to be further removed from the owner check with IRS rules). Loan docs would need to be drawn up. Yes I have done this. The money goes from your 403b to your 'self directed IRA' (Equity Trust is one of these companies) and when they get the paperwork from the 'company' you are loaning money to they will send them the money. They are the custodian of the money.

Not entirely true, what you list can be done, but it is possible to own investment real estate directly and not just through a loan, you can even borrow against investment properties held in an IRA. You cannot use the IRA property for your personal use without permission of the department of labor. I have a friend who deals with this extensively.

Offline Roundabouts

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Re: Rolling over a 403(b) for cash out?
« Reply #9 on: December 14, 2012, 03:24:18 PM »
Well since you mentioned wanting to retire in 10 yrs I will suggest you go to www.mrmoneymustache.com  From what you said about your dreams i think you would find some very useful information there. 

IMO I would take the cash.  Ideally you want your money to work for you but given your debit load and lack of savings I'd say you may not be at that point yet.  Debit is cancer.  You have no to little savings and if something happens then poof you are in debit again.  One car crash one illness you know the story.   The debit to get rid of is the student debit.  Only because it can not be forgiven (my understanding)   Credit cards may have to come first if they are high interest. It's a whole process and a math game.  Run the numbers run the numbers run the numbers.  If you had no debit how long would it take you to save the amount in your account?  How much money are you flushing down the toilet paying interest? 

You are smarter than you think.  You have already figured out that big chunks are hard to come by.  You are not just going to make an emotional decision.  You are looking to the future.  You have a goal,   to live dream & work a dream.  That dream will be easier to obtain if you have no debit if you have minimal monthly expenses, if you have a savings to carry you through.   

I guess you have to decide what are the best steps to take to live your dream.  How hard are you willing to work to get it?  What are you willing to do without now so you can have later?   

Maybe a Roth IRA would be a good option. Yes you pay the taxes on the money now vs paying on it later.  You can take that money out any time after a period of time without penalty and without taxes.  The only portion that you have to be concerned about is the money made (by your little employees) with what you put in.

Currently if I could get our cash out 100% of the 401k I would take it.  We could only take the employer match portion.  So we took that.  Every one was saying we are foolish for doing that.  But we will save about 1/2 that amount in interest Plus in 4 yrs we will be able to save 3 times the amount we took out.  I just did not see the market doing that good. 

Good luck and keep working the numbers.  What ever you do when you come up with a plan don't forget to actually WORK the plan  ;)

Offline FrugalFannie

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Re: Rolling over a 403(b) for cash out?
« Reply #10 on: December 14, 2012, 05:11:33 PM »
Not entirely true, what you list can be done, but it is possible to own investment real estate directly and not just through a loan, you can even borrow against investment properties held in an IRA. You cannot use the IRA property for your personal use without permission of the department of labor. I have a friend who deals with this extensively.

I will then defer to your post. Now that I read what you posted I think I was wrong and you are right.

Offline fred.greek

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Re: Rolling over a 403(b) for cash out?
« Reply #11 on: December 14, 2012, 09:24:01 PM »
Just as an IRA can own stock in General Motors, an IRA can own real estate.  Ours have done so for quite a while.  Rental real estate profits fall back into the IRA.  If your IRA hold non-rental property, it must have enough other cash flow to pay the tax and insurance on the property. 

Offline EagleSteel

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Re: Rolling over a 403(b) for cash out?
« Reply #12 on: December 18, 2012, 02:52:14 PM »
WakingUp,

Roll it over to a Roth IRA. Yes it is a taxable event but do it now. Don't wait for 2013 because we have no idea what that taxes are going to be. At the same time learn how the market works and watch patterns of individual stocks and sectors. For example I play the Biotech sector and I've made a lot of money doing that. I rolled over my tiny 401k, $6,834, in Feb 2010. As of today my account balance is north of $45k plus I've taken out almost $46k in the last two years. I've paid off some bills plus a ton of upgrades to my home. All I did was to learn how small bio techs stocks react to news on the drugs that they are testing. It's very risky and you have to stay on top of it but it can be very rewarding. I road ARNA up from $1.86 to over $9 and ACAD from $2.12 to $5.83 this year. Now I don't recommend that you jump right into that sector. If you want in that you need to do a lot of research on the companies you go into. As of right now I'm sitting in cash but I may buy SLV until the budget issue gets settled. BTW SLV is "shares of silver"