403 (b) With Outstanding Loan, Can You Transfer?

[CALTCAgent]

I have not run into this situation,

Can you transfer a 403 (b) that has an outstanding loan?

If so, how can you avoid any tax penalty?

 

[Norwayguy]

I have not run into this situation,

Can you transfer a 403 (b) that has an outstanding loan?

If so, how can you avoid any tax penalty?

First transferred to what? Is this going to a contract Exchange within the same employer or to a new employer or another type of qualified plan? If still employed with the same employer and under 59 1/2 does the plan document even allow for loans any longer? Chances of finding a carrier willing to accept the contract Exchange with the existing loan is doubtful.

How much is the loan and what is the size of the contract. It may be possible to do a partial transfer and take out a new loan and pay off the old loan and then do a full surrender on the remaining balance of the old policy.

 

[CALTCAgent]

First transferred to what? Is this going to a contract Exchange within the same employer or to a new employer or another type of qualified plan?

Sorry, I wasn't clear. Transfer to another qualified plan. Not with an employer. The person is 68 and still working.

How much is the loan and what is the size of the contract. It may be possible to do a partial transfer and take out a new loan and pay off the old loan and then do a full surrender on the remaining balance of the old policy.

I didn't get a chance to ask yet. I am guessing less than 50K in the contract.

 

[Norwayguy]

Sorry, I wasn't clear. Transfer to another qualified plan. Not with an employer. The person is 68 and still working.

I didn't get a chance to ask yet. I am guessing less than 50K in the contract.

Is there a reason you want to transfer the loan amount and not just have policy values pay off the loan she is passed the penalty tax.

 

[CALTCAgent]

Is there a reason you want to transfer the loan amount and not just have policy values pay off the loan she is passed the penalty tax.

She asked if she could transfer the policy value in the 403(b), not the loan amount. Before I look further I wanted to know if this is even possible.

Maybe I am not understanding something here. Doesn't she make payments on the loaned amount from somewhere besides policy values?

 

[Norwayguy]

She asked if she could transfer the policy value in the 403(b), not the loan amount. Before I look further I wanted to know if this is even possible.

Maybe I am not understanding something here. Doesn't she make payments on the loaned amount from somewhere besides policy values?

She does make payments from elsewhere but she can use a partial withdrawal to pay off the outstanding loan and then transfer the rest. Depending on where she wants to transfer to a loan may not be possible. I have seen paying off the loan in this way be as simple as a letter of instruction to the carrier to go along withe the transfer paperwork.

You have said another qualified plan, are we speaking of another 403b or 401k? Obviously not an IRA as they do not allow loans. Does the new plan allow for loans, does the new carrier allow loans? Since she is 68 it is probably easiest to pay off existing loan yes it will be taxable as a distribution but unless the loan was for the purchase of a primary residence it had a max length of 5 years how many years are left on the loan anyways?

 

[CALTCAgent]

You have said another qualified plan, are we speaking of another 403b or 401k? Obviously not an IRA as they do not allow loans.

Does the new plan need to allow for loans?


I was thinking IRA.

unless the loan was for the purchase of a primary residence it had a max length of 5 years how many years are left on the loan anyways?

Good question. I did not ask. She did mention something about buying a Bed and Breakfast. I doubt if that is her primary residence, at least not right now.

 

[scagnt83]

Does the new plan need to allow for loans?


I was thinking IRA.

.

An IRA is not a Qualified Plan. A Qualified Plan is employer based (current or former).

An IRA is an Individual Retirement Arrangement.
It is considered to be Qualified funds. But it is not a Qualified Plan. There is a difference.

And as Peter pointed out, an IRA does not accept loans. If the loan transferred it would have to be to a QP, not an IRA.
(unless its for primary residence as Peter pointed out)

 

[Norwayguy]

Does the new plan need to allow for loans?


I was thinking IRA.





Good question. I did not ask. She did mention something about buying a Bed and Breakfast. I doubt if that is her primary residence, at least not right now.

If your are going to an IRA it is not possible to transfer the loan. She needs to pay off the loan which can be done by a partial surrender of the 403b which will be a taxable event or you can do a partial transfer of the 403b to the IRA and leave the loan in the 403b to be paid over time, just realize you will leave more than just the loan amount in the 403b plus as she continues to pay back the loan the 403b will be holding unused funds or funds left in the old investment and if the new one is a better fit why do that.

 

[CALTCAgent]

If your are going to an IRA it is not possible to transfer the loan. She needs to pay off the loan which can be done by a partial surrender of the 403b which will be a taxable event or you can do a partial transfer of the 403b to the IRA and leave the loan in the 403b to be paid over time, just realize you will leave more than just the loan amount in the 403b plus as she continues to pay back the loan the 403b will be holding unused funds or funds left in the old investment and if the new one is a better fit why do that.

I am thinking if she owes a lot of money, possibly she will want to pay off the loan before transferring to avoid a significant tax?


Maybe going to a 403(b) would make more sense.


Who are the insurance companies in that market?

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An IRA is not a Qualified Plan. A Qualified Plan is employer based (current or former).

An IRA is an Individual Retirement Arrangement.
It is considered to be Qualified funds. But it is not a Qualified Plan. There is a difference.

Good point!

If the loan transferred it would have to be to a QP, not an IRA.
(unless its for primary residence as Peter pointed out)

Just clarifying, the loan can't be transferred to an IRA even if its for primary residence?


The loan can be a max of 5 years for the primary residence?


I am curious what the loan terms typically are? (years and interest)