Money is funny, but I don't get it, honey
June 14, 2017 12:11 PM Subscribe
Please help me navigate the waters of retirement savings and student loans; how to tackle this loan and keep growing my savings?
I'm a 32 year old person. For three years (2011-2014) I was a public school teacher, and during that time, I was able to contribute money into a Deferred Compensation Plan, a 403(b) for teachers. By the time I left my teaching job, I had about 17K saved. I just checked this account again (after not having contributed any money since leaving teaching in 2014) and it's over 20K now. This past year, the interest rate was 17.3%. (I looked back to see past interest rates but am having trouble finding information for several years back.)
I also have about 8K in student loans. About half the loan has an interest rate of 2.4%, and the other half is 6.5%. I pay $182 monthly.
I currently work as a nanny, and I also have a growing art business. I'm not contributing to the 403(b) retirement account, but I could easily start again.
My questions are:
Do I keep my 20K in this retirement account, and start contributing again?
Do I move my 20K to a different type of account (IRA, etc)?
Do I increase my monthly loan payment?
Do I pay off my student loan with retirement funds? (I know this is considered a BAD, BAD idea, but I'm not entirely sure why).
Please forgive my ignorance on this subject! Thanks for any advice.
I'm a 32 year old person. For three years (2011-2014) I was a public school teacher, and during that time, I was able to contribute money into a Deferred Compensation Plan, a 403(b) for teachers. By the time I left my teaching job, I had about 17K saved. I just checked this account again (after not having contributed any money since leaving teaching in 2014) and it's over 20K now. This past year, the interest rate was 17.3%. (I looked back to see past interest rates but am having trouble finding information for several years back.)
I also have about 8K in student loans. About half the loan has an interest rate of 2.4%, and the other half is 6.5%. I pay $182 monthly.
I currently work as a nanny, and I also have a growing art business. I'm not contributing to the 403(b) retirement account, but I could easily start again.
My questions are:
Do I keep my 20K in this retirement account, and start contributing again?
Do I move my 20K to a different type of account (IRA, etc)?
Do I increase my monthly loan payment?
Do I pay off my student loan with retirement funds? (I know this is considered a BAD, BAD idea, but I'm not entirely sure why).
Please forgive my ignorance on this subject! Thanks for any advice.
Best answer: Do I keep my 20K in this retirement account, and start contributing again? First you need to figure out if this is actually a Deferred Compensation retirement account, usually referred to as a governmental 457b, or some other type of retirement account, like a 403b, 401k, or 401a. If it is a 457, great, that is pretty much the best kind of retirement account you can have (in my opinion)! Why? Because you can withdraw the money at any time, with no early withdrawal penalty. You will be taxed however, assuming that this money was withheld from your paycheck on a pre-tax basis. One important thing to note is: if you are no longer employed by the school district that offered this account, you no longer have the option to contribute to it. You will need to open a separate account, either a traditional or Roth IRA, for any retirement contributions you make while employed as a nanny/artist.
Do I move my 20K to a different type of account (IRA, etc)? I would not roll over a 457 into an IRA, because you will lose the ability to make early withdrawals (only 99% sure on this point, you'll want to confirm).
Do I increase my monthly loan payment? Can you increase your monthly payment? If you can afford to, then yes, absolutely. $8K really isn't that much. If you concentrate on paying it off you should be able to do so in a year or two max.
Do I pay off my student loan with retirement funds? No, never. Don't do it.
posted by scantee at 12:29 PM on June 14, 2017 [3 favorites]
Do I move my 20K to a different type of account (IRA, etc)? I would not roll over a 457 into an IRA, because you will lose the ability to make early withdrawals (only 99% sure on this point, you'll want to confirm).
Do I increase my monthly loan payment? Can you increase your monthly payment? If you can afford to, then yes, absolutely. $8K really isn't that much. If you concentrate on paying it off you should be able to do so in a year or two max.
Do I pay off my student loan with retirement funds? No, never. Don't do it.
posted by scantee at 12:29 PM on June 14, 2017 [3 favorites]
Best answer: Do I keep my 20K in this retirement account,
Yes.
and start contributing again?
I don't believe you can contribute to that 403(b) any longer since it's a workplace-linked retirement account.
Do I move my 20K to a different type of account (IRA, etc)?
No need, but you can open an IRA and start contributing to that. If you change jobs over time it's not unusual to end up with multiple retirement accounts. It's sometimes good to consolidate them, but sometimes not. But having two isn't a big deal.
Do I increase my monthly loan payment?
You could. But one is a relatively low interest rate - can you pay off the 6.5% loan faster?
Do I pay off my student loan with retirement funds? (I know this is considered a BAD, BAD idea, but I'm not entirely sure why).
generally you pay a penalty for withdrawing retirement funds early so it's not a good idea. Plus apparently you have some great funds there which are providing good returns so that's another reason not to do it.
posted by GuyZero at 12:33 PM on June 14, 2017 [5 favorites]
Yes.
and start contributing again?
I don't believe you can contribute to that 403(b) any longer since it's a workplace-linked retirement account.
Do I move my 20K to a different type of account (IRA, etc)?
No need, but you can open an IRA and start contributing to that. If you change jobs over time it's not unusual to end up with multiple retirement accounts. It's sometimes good to consolidate them, but sometimes not. But having two isn't a big deal.
Do I increase my monthly loan payment?
You could. But one is a relatively low interest rate - can you pay off the 6.5% loan faster?
Do I pay off my student loan with retirement funds? (I know this is considered a BAD, BAD idea, but I'm not entirely sure why).
generally you pay a penalty for withdrawing retirement funds early so it's not a good idea. Plus apparently you have some great funds there which are providing good returns so that's another reason not to do it.
posted by GuyZero at 12:33 PM on June 14, 2017 [5 favorites]
Best answer: What carrioncomfort said. Whatever is earning you the best return is the place your money should be. If the interest you pay on your student loan is less than the interest you earn elsewhere, prioritize elsewhere.
It sounds like the 403(b) is doing fine; the only reason to change to an IRA would be if the fund fees were expensive (you can often find cheaper funds outside of 403b or 401k plans), the fund options were limited or poorly performing, or if you would like to begin contributing to the account again (since you're no longer an employee of a qualifying org, you can't).
In your situation, I'd move the funds to an IRA at a discount broker and start contributing again while still making the minimum on the student loans. I'd also look at consolidating as a way to reduce that higher interest rate.
posted by notyou at 12:35 PM on June 14, 2017 [1 favorite]
It sounds like the 403(b) is doing fine; the only reason to change to an IRA would be if the fund fees were expensive (you can often find cheaper funds outside of 403b or 401k plans), the fund options were limited or poorly performing, or if you would like to begin contributing to the account again (since you're no longer an employee of a qualifying org, you can't).
In your situation, I'd move the funds to an IRA at a discount broker and start contributing again while still making the minimum on the student loans. I'd also look at consolidating as a way to reduce that higher interest rate.
posted by notyou at 12:35 PM on June 14, 2017 [1 favorite]
Response by poster: Thanks for the answers so far! This is already very helpful. I mistakenly wrote that I have a 403(b) plan; it's actually a 457(b). My fault!
posted by sucre at 12:36 PM on June 14, 2017
posted by sucre at 12:36 PM on June 14, 2017
Best answer: Do I move my 20K to a different type of account (IRA, etc)?
It depends on the funds available to you in the 403(b) and what the fees for maintaining the account are. If you only have funds with high expense ratios in the current account and/or there's a year maintenance fee, you should move it to an IRA.
There's some specific advantages to 403(b)s and IRAs. If you ever want to be able to roll the money into a 401(k) (somewhat unlikely, but possible) you can only do that from a 4xx account, you can't do so from an IRA.
If you want to use $10K of it penalty-free for a home down payment with the first time homeowner's option, you can only do that from an IRA.
Do I pay off my student loan with retirement funds? (I know this is considered a BAD, BAD idea, but I'm not entirely sure why).
Tax sheltered accounts will (hopefully) help your savings grow substantially before you need it. Once money is taken out of a tax sheltered account, it can't be put back. Your savings are earning more than what your student loans are costing you, so it's a net positive, even though the amount of free money you have to spend right now is reduced.
Also, removing money early from a 403(b) (I just saw your edit, so ignore this, but I'm leaving it in in case this helps someone else that reads this), unless it's granted special treatment like the first time home owner's allowance or some health care costs, has a 10% penalty and no matter what you would have to pay taxes on it as if you earned it this year.
457(b)s are a special case, in that you can remove money from them at any point after you leave employment with that government agency without the penalty. But again, you still have to pay income tax on them. This makes them really nice to hold onto for things like home down payments or early retirement, so I'd still urge you to hold onto it.
Do I increase my monthly loan payment?
Paying off the more expensive one might be worth it. But how much emergency savings do you have? Would that money be better spent growing your art business? 6.5% is still pretty low as far as loans go.
Do I keep my 20K in this retirement account, and start contributing again?
Ideally, yes. More money for retirement (or disability) is a good thing. But you'd have to open a new account to do so.
This past year, the interest rate was 17.3%.
As a note, you may have misread this. It's possible you got that rate, but that would be exceptionally good returns for 2016. The S&P 500, for example returned 12.25%. My 401(k) returns were 11.6 (lower than the S&P because of some lower return but safer bond funds). Some funds did get up in that range, so it's possible you got lucky, but you might want to verify.
Lastly, I'd recommend reading the /r/personalfinance wiki, which has a lot of good information about the basics of how to save and why.
posted by Candleman at 12:42 PM on June 14, 2017 [3 favorites]
It depends on the funds available to you in the 403(b) and what the fees for maintaining the account are. If you only have funds with high expense ratios in the current account and/or there's a year maintenance fee, you should move it to an IRA.
There's some specific advantages to 403(b)s and IRAs. If you ever want to be able to roll the money into a 401(k) (somewhat unlikely, but possible) you can only do that from a 4xx account, you can't do so from an IRA.
If you want to use $10K of it penalty-free for a home down payment with the first time homeowner's option, you can only do that from an IRA.
Do I pay off my student loan with retirement funds? (I know this is considered a BAD, BAD idea, but I'm not entirely sure why).
Tax sheltered accounts will (hopefully) help your savings grow substantially before you need it. Once money is taken out of a tax sheltered account, it can't be put back. Your savings are earning more than what your student loans are costing you, so it's a net positive, even though the amount of free money you have to spend right now is reduced.
Also, removing money early from a 403(b) (I just saw your edit, so ignore this, but I'm leaving it in in case this helps someone else that reads this), unless it's granted special treatment like the first time home owner's allowance or some health care costs, has a 10% penalty and no matter what you would have to pay taxes on it as if you earned it this year.
457(b)s are a special case, in that you can remove money from them at any point after you leave employment with that government agency without the penalty. But again, you still have to pay income tax on them. This makes them really nice to hold onto for things like home down payments or early retirement, so I'd still urge you to hold onto it.
Do I increase my monthly loan payment?
Paying off the more expensive one might be worth it. But how much emergency savings do you have? Would that money be better spent growing your art business? 6.5% is still pretty low as far as loans go.
Do I keep my 20K in this retirement account, and start contributing again?
Ideally, yes. More money for retirement (or disability) is a good thing. But you'd have to open a new account to do so.
This past year, the interest rate was 17.3%.
As a note, you may have misread this. It's possible you got that rate, but that would be exceptionally good returns for 2016. The S&P 500, for example returned 12.25%. My 401(k) returns were 11.6 (lower than the S&P because of some lower return but safer bond funds). Some funds did get up in that range, so it's possible you got lucky, but you might want to verify.
Lastly, I'd recommend reading the /r/personalfinance wiki, which has a lot of good information about the basics of how to save and why.
posted by Candleman at 12:42 PM on June 14, 2017 [3 favorites]
Best answer: Whatever you do with that account, it's a good idea to keep saving for retirement. The easiest way to do that is with an IRA. If you can save more than $5.5k per year, you could look into also opening a solo 401k, which may make sense for you depending on your income from the art business.
posted by Salamandrous at 12:56 PM on June 14, 2017
posted by Salamandrous at 12:56 PM on June 14, 2017
This thread is closed to new comments.
ABSOLUTELY NOT. Why? This money is making way more for you at 17.3% than you are losing on your 2.4% and 6.5% interest student loans.
posted by carrioncomfort at 12:17 PM on June 14, 2017 [8 favorites]