AboutJohn D Smith, CFP Expertise I can answer detailed questions regarding mutual fund investing, retirement planning, education planning and related financial planning/investment issues. I have a B.S. degree in Financial Planning & Counseling. I am also a Certified Financial Planner practitioner and have performed fee only investment management and financial planning services for the past 11 years.
Expert: John D Smith, CFP Date: 11/27/2007 Subject: taking from fund to payoff loan?
Question QUESTION: Hello John Smith,
I have a fund (not sure if it's a 403B or if it's called a mutual fund) with Planmember Corp (www.planmember.com) and I think they use Vankampen investment firm .... I currently have about $22,000 and I am thinking about withdrawing or taking from it to payoff a long standing student loan that currently has a balance of $14,300 (4.875% interest rate).
I would like to do this because I have been working in Bangkok, Thailand for almost 3 years and I don't plan to return to the US for a very long time ... So, I'm no longer able to receive the tax break on the interest paid on the student loan ... and I haven't contributed to the above fund for many years now... Would this be wise to do? If so, What's the process? What would be the penalty?
Please note: As you probably already know, since I work overseas, I get up to about $80K in tax-free income... Does this include investment funds and such?
Thanks for your help.
-alex
ANSWER: If you take the $$ out of the 403b, the amount withdrawn will be subject to a 10% early withdrawal penalty and will be counted as taxable income in the year withdrawn. This is a pretty steep penalty and therefore does not make sense in most instances. At a 4.875% interest rate on the loan, this is cheap money in my opinion and I would not be in a big hurry to pay this off with your 403b assets. Regarding your 2nd question, I believe the foreign tax credit of 80k would also apply to investment earnings, however, I am not a CPA so you should double check this with a qualified tax professional. I hope this helps.
---------- FOLLOW-UP ----------
QUESTION: John,
Thanks for your quick response ... If I can please ask you a follow-up question: Would my mortgage interest paid (just over $9,000 USD) on my condo this past year help me in terms of the tax that I would have to pay on this withdrawal?
Also, how exactly does it work when closing such an account? Dividends are sold?
Thank you,
-alex
Answer Under most circumstances, mortgage interest is deductible as an itemized deduction on your income tax return, which reduces the amount of income subject to taxation. Depending on the value of the 403b and how much you withdraw, this could help with offset some of the income tax due on the 403b withdrawal, however, the 10% early withdrawal penalty would still have an impact. I hope this helps.
