Switched jobs & short on cash. Should I withdraw from 403(b) or borrow from 401(k)?

Question

I switched employers a while back and obviously this resulted in a new place to throw my retirement money. Employer A was an academic institution so that money was in a 403(b), now I'm in your traditional 401(k).

I was only working there for a short period of time post college which resulted in only about $15k sitting in that said 403(b).

I'm currently having some financial pains, long story short things at work aren't going too hot and I might be going a few days without work if I run out of vacation/personal time to cover the gap. What kind of penalties would I be facing if I yanked out the money from the 403B to cover my expenses? Do I withdraw from that 403(b)? Should I borrow against my 401(k)?

Any ideas?

Answer 1

Kudos to you on having money in a retirement account as early as after college. Many people don't start investing towards retirement until far to late and compound interest makes a major difference in those early years.

Ideally, neither withdraw nor borrow from these accounts. Withdrawing from your 403b will incur a 10% penalty unless you are over the minimum age on top of the normal tax on that income. With a 401K loan you're putting yourself at risk if you run into a situation where you can't pay the loan back of incurring the same penalties as an early withdrawal. This article covers the concerns well.

In general, you want to view your retirement money as untouchable until the distributions need to start coming in retirement. It's your future in there.

Of course, this doesn't help the short term cash need. Do you have money in an emergency fund somewhere? Could a relative loan you money? Can you move to a less expensive place in advance and squirrel away some of what would have been your rent cash? Can you cut back to bare necessities and do the same? Do you have some nice stuff sitting around that you could sell to make up that needed cash? Will your current employer pay out unused vacation or are you getting any severance from this situation? Will you qualify for unemployment?

I other words, think about what you would do to get the money if your retirement accounts weren't there. Then do that - as long as it's legal and doesn't involve running up debt on high interest lines of credit - instead of borrowing against your future.