If you are having trouble paying off your credit card debt, you can sell off your 403(b) mutual funds and withdraw money from your account. While a 403(b) plan is meant to be a retirement account, there are a few ways to take out money early. The best option depends on the amount of money you need and your current work status.
TL;DR (Too Long; Didn't Read)
To withdraw money from your 403(b) for credit card debt, you must meet the IRS requirements for a hardship distribution. However, you may be able to use a plan loan or convert your 403(b) to an life annuity instead.
Understanding Hardship Withdrawal Requirements
If you can't make your credit card payments because of financial problems, you can obtain money from your 403(b) as a hardship withdrawal. You must prove an immediate and heavy financial need to your employer to take a hardship distribution. Hardship distributions have been used for things like paying off medical bills, making a down payment on a new home or preventing a home eviction or foreclosure. You can only make a hardship distribution for your credit card debt if it is part of a similar financial emergency.
If you qualify for a hardship withdrawal, you'll owe money to the IRS. You'll owe income tax plus a 10 percent penalty on the entire withdrawal.
Exploring Penalty Exceptions
The IRS lists a few situations that avoid the early withdrawal penalty. There is no penalty if you are permanently disabled and can no longer work. You can also take out money penalty-free to pay off medical expenses that exceed 7.5 percent of your income for the year. Lastly, there is no penalty for taking out money to settle a court-ordered divorce agreement.
You'll still owe income tax for selling off your 403(b) mutual funds, but you won't owe the 10 percent penalty.
Using a Plan Loan
You may also be able to take money out of your 403(b) mutual funds through a plan loan. Not all plans offer loans. Your employer makes this decision when it launches your 403(b) plan.
If your plan offers loans, you can borrow up to $50,000 from your mutual fund balance. You'll need to pay the loan back with interest within five years. Otherwise, the IRS will consider your loan to be a withdrawal and assess taxes and a penalty. If you can pay your loan back on time, this is the best way to use your 403(b) to pay off your credit card debt.
Receiving Life Payments
If you need extra money for the rest of your life, you can convert your 403(b) mutual funds into a life annuity. This turns your account balance into equal monthly payments for the rest of your life. You won't owe the early withdrawal penalty on these payments, but you will still owe income tax. If you choose this option, you won't be able to add any money back to your 403(b) in the future.
David Rodeck has been writing professionally since 2011. He specializes in insurance, investment management and retirement planning for various websites. He graduated with a Bachelor of Science in economics from McGill University.