How should I pay for this?

February 2, 2009 11:50 AM

Should I pay for an unexpected expense using a credit card or by borrowing from my 403(b)?

I don't have to worry about job security and I'll be able to pay back the debt in about a year if I'm frugal, two years if I'm not. Last time I had a large unexpected expense, I had no choice but credit cards, so I'm not sure what the pros and cons are here. Is it just a matter of which has the lower interest rate?

(And I know that basic financial advice says to have money set aside for just this situation, and I have clearly ignored said advice. I got really excited about saving for retirement instead.)

posted by Mavri to work & money (10 comments total)

Are you going to take a tax hit by borrowing from your 403b?
posted by jerseygirl at 11:54 AM on February 2

I'd use the credit card. Borrowing from retirement is a very bad precedent to set. Trust me, I know this.

Not that either one is good, of course.
posted by jgirl at 12:12 PM on February 2 [1 favorite]

Use a credit card. When you pay back a loan to a 401k or 403b type account, you are effectively getting taxed twice, since you have to pay the loan back with money that has already been taxed. It will then be taxed again upon final withdrawal.
posted by mkb at 12:19 PM on February 2

Credit card. You can get a new one with an introductory 0% offer for a year and use that year to pay it off (assuming of course that you have decent credit). If you can't get a new one, try calling your credit card issuer and asking for an APR reduction before you put the expense on there. Can't hurt and might help.
posted by rabbitrabbit at 12:42 PM on February 2 [1 favorite]

How huge is this unexpected expense? Could you not take-out a personal loan from your bank (or, prefereably, credit union) for less interest than the credit card APR? Especially if you intend to pay it off within a year or two.

And I know that basic financial advice says to have money set aside for just this situation
Yeah, well, if you were to follow all the "you should have been saving for this possibility" advice here, you'd have to be making well into 6-figures in the first place.
posted by Thorzdad at 12:56 PM on February 2

Credit card. If you have an unexpected life event like losing your job, you have to pay back the retirement account loan immediately or face huge penalties.
posted by infinitewindow at 12:56 PM on February 2

You can get a new one with an introductory 0% offer for a year and use that year to pay it off (assuming of course that you have decent credit).

This is what I did a couple of years ago. I got a 0% Discover card for 12 months. By the time I paid it off they actually gave me like 100 or 200 hundred dollars through their cash back bonus program.
posted by damn dirty ape at 1:54 PM on February 2

I'd use the credit card. Borrowing from retirement is a very bad precedent to set. Trust me, I know this.
jgirl & I, both.
posted by IAmBroom at 2:54 PM on February 2

I'd use the retirement account IF, and only if, you are certain it will be paid back promptly. You will be paying yourself interest. In my case, the 401(k) money that I borrowed didn't get hammered when stocks tanked, because I was using it.
posted by theora55 at 4:04 PM on February 2

When you pay back a loan to a 401k or 403b type account, you are effectively getting taxed twice, since you have to pay the loan back with money that has already been taxed. It will then be taxed again upon final withdrawal.

This is a myth that seems to be repeated over and over again. There may be various reasons not to borrow from a retirement fund but this is not one of them.

Think about it. On Monday you take a loan on your retirement account and deposit it in your checking account. On Tuesday (or a year from now, it doesn't matter), you write a check and pay back the loan. How is the money taxed twice? It's just the same money. You transferred it out of your retirement account and later transfer the same money back into your retirement account. No taxes are involved in either transaction.

On the other hand, the interest you pay is taxed twice, but the interest is generally small compared to the loan principal.
posted by JackFlash at 6:18 PM on February 2