Planning for a Loan from 401(k)/403(b) Retirement Account

Jessica
Author:
Community Mentor
Rate This Article:
(Rated 4.8 by 5013 viewers)



When you are in need of cash and have no other options to get the required amount, 401(k) and 403(b) plan loans can be alternatives.

When contributing to your 401(k) or 403(b) Retirement Plan, you can borrow up to 50% of the deposited account balance or $50,000, whichever is less. But if you have already taken out a 401k loan within the past 1 year, then you will be offered the difference between the outstanding loan balance and what you have already received.

If you are experiencing severe financial distress and you require cash from your 401(k) plan or 403b account, it is better to borrow from the account rather than make a hardship withdrawal, because a withdrawal from a 401(k) plan account before 59 and 1/2 years of age requires you to pay a 10% penalty.

Payments against 401(k) or 403(b) loans:
Getting a loan from a retirement account will require you to pay interest at the Prime Rate plus an additional 1 to 2%. This will allow you to pay back the interest to your plan account so that you can get disbursements at or near your retirement time. Moreover, you don't have to pay taxes on the interest until retirement when you take money out from the plan account. Either of the loans must be repaid within 5 years unless the money is used for home financing, which may allow a longer repayment term.

Before you decide upon a 401k plan or 403b loan, you should consider the pros and cons of these loans.

Below are the pros of getting a 401k or 403b loan:
  • Getting a loan from any of these retirement accounts does not require a thorough check of your credit history unlike other loans. You also do not have to fill out a loan application.

  • You can generate a good deal of savings with your 401k or 403b account. Being a savings account, it gives you interest and then there are the interest payments on your loan which are also added to your contribution.

The possible consequences of taking out a loan from your 401k and 403b Plan accounts are:
  • When you pay back your loan with interest, you take out cash from your regular checking and savings accounts. This reduces the interest being paid on either account because the amount deposited in each account is reduced.

  • Unless you pay off the loan, it will be seen as an early distribution from the account and you will owe federal and state income taxes along with the 10% penalty if you are under 59 and 1/2 years of age.

  • If you quit or are fired, then the entire 401(k) or 403(b) loan amount must be paid back within 60 days. If you fail to pay off the loan, then it will be considered as a default and you will need to pay taxes and penalties.

401(k) or 403(b) loans are beneficial because they allow you to borrow cash from your retirement savings but do not charge taxes on the interest unless you default. There are no restrictions on the use of these loans except what your employer may have put into place. These types of loans do not require you to have a good credit score.

Related References:
Related Articles

Related Forum Discussions
Last updated on January 20, 2013

Latest Community Discussions
We want to buy a house and have around $8k saved as down payment but we will require around $12k as down payment for our dream home. Wi...

posted on 2013-12-30 01:09:55
I have taken out a loan from my 401k account. Now, I want to take out a mortgage. I don’t even have a lot of money saved for down pay...

posted on 2013-06-18 00:43:32
My friend has a loan on his 401K. He now wants to do a hardship withdrawal for home buying. He needs to know whether or not there is an...

posted on 2012-04-08 23:57:41
One of my uncles died and left his 401 b to 4 of his relatives. I need to know whether or not this money have to go in a retirement acc...

posted on 2012-01-09 02:04:05
Is using 401K loan a good method to come up with downpayment? How does lender view the application when majority of the downpayment is ...

posted on 2011-11-22 12:53:38




Ask question to Author
Subject
Image Verification


Can't read the image? click here to refresh
Message body
Author Message
Maria C. Ramirez

Guest






0.10 Dollars($)

Post     Post subject: loan 401k

requesting loan from my 401k plan as soon as possible.
image
Mini Profile  Jessica
Jessica
Community Mentor
Community Mentor


Joined: 08 Jun 2004
Posts: 808
Location: OHIO

493.63 Dollars($)

Post     Post subject: RE:

Hi Maria,

If you are interested in taking a 401k loan, then you should contact the bank where you have created a 401k Plan account. You should talk to your employer whose contribution is similar to that of yours for the 401k Plan account. And, in case you have any other query, feel free to let us know about it.

Regards,
Jessica.
image
F Davis

Guest






0.10 Dollars($)

Post     Post subject: lLoan against retirement account

I am interested in taking out a loan against my STRS of Ohio Retirement account [$158000] and would be willing to pledge it and a life insurance policy as a gurantee for repayment.
image
Mini Profile  adonis
adonis



Joined: 22 Oct 2005
Posts: 12177
Location: ALASKA

1313.62 Dollars($)

Post     Post subject: RE

No problem davis, I will let samantha(moderator of this forum) know about your need and they will help you out.

This community has got lenders, you can join here so as to avail better sevice out from the community.

Thanks
image
Mini Profile  Samantha
Samantha
Community Mentor
Community Mentor


Joined: 16 Sep 2005
Posts: 1609
Location: MASSACHUSETTS

150.93 Dollars($)

Post     Post subject:

Hi Davis,

Welcome to MortgageFit Forums.

So far I know that the account balance in any plan under STRS can't be considered as a liquid asset and as such can't be held as collateral while applying for a loan.

In addition to that you are not entitled to withdraw funds while employed. So, I have doubts about the information what you have on loan against STRS plan.

I would like to check with them once again. For any other requirement or information you may get back to us always.

We will be happy to help you in the best possible manner.

God bless you.

For Mortgagefit,
Samantha

_________________
Know how to compare lenders with mortgage booklet
image
Mini Profile  ckalvesmaki

Community Expert
Community Expert


Joined: 28 Jan 2006
Posts: 378
Location: Dallas

56.51 Dollars($)

Post     Post subject:

Davis,

Why do you think you can't qualify for a regular mortgage?

_________________
Cedric Kalvesmaki
***Professional Disclaimer***
While I am a Mortgage Professional, this advice is generic in nature only.

888-383-9019

emails and PMs gladly answered
www.freedommortgagetexas.com

Freedom Mortgage
I live in TX but cover all 50 states
image
andy

Guest






0.10 Dollars($)

Post     Post subject: 403b loan

I have around 36000 in my individual account plan (I.A.P.) and would like to borrow as much as possible so I can buy equipment for my next feature "Oceans 13" schedualed to start within a week or two.
image
Mini Profile  Samantha
Samantha
Community Mentor
Community Mentor


Joined: 16 Sep 2005
Posts: 1609
Location: MASSACHUSETTS

150.93 Dollars($)

Post     Post subject:

Hi Andy,

Welcome to MortgageFit Forums.

You can borrow money from your 403(b) plan but you should keep in mind that a 403(b) is intended to save money for your retirement years. You should borrow any amount from it only if it absolutely necessary and there are no other options left.

Whatever you borrow from the account isn't subject to income taxes or early distribution penalties but as a well wisher I must caution you that with this you risk your savings for the years when they are required most.

If you are certain that you can fill it up again then it's fine but do think twice before borrowing from this account.

God bless you.

For Mortgagefit,
Samantha

_________________
Know how to compare lenders with mortgage booklet
image
douglas

Guest






0.10 Dollars($)

Post     Post subject:

Hi Andy,

It is possible to get a 403(b) loan under certain conditions. It's better if you check with plan administrator to be assured that the loan will not be viewed as early distribution.

If it is viewed as a distribution and if your age is below 59 1/2 then, you may have to face 10% tax penalty.
image
Mini Profile  Caron
Caron
Moderator


Joined: 19 Jul 2005
Posts: 1516
Location: florida

279.74 Dollars($)

Post     Post subject:

Andy,

Is it that much necessary to take a loan from your 403(b) account? Did you try for any other options?

I admit that there are several advantages with a 403(b) loan as it is much easier to get than a commercial loan. You don't need any credit check and don't have to go through the lengthy approval process.

Also, you need not pay any taxes on the loan at the time of receiving the money within a limit. You can borrow 50% of your vested account balance.

But you must consider the fact that you have to repay it with after-tax dollars while the money goes into your account on a pre-tax basis. You are not going to get credit for all the taxes that have been paid already. If you are comfortable with that then you can go for it.

Thanks,
Caron
image
charles m

Guest






0.10 Dollars($)

Post     Post subject: 401k account

I have lost my job due to plant closing, I have approximately 250,000 in my 401 plan, can I borrow from this plan to invest in a business?
image
Mini Profile  larry




Joined: 27 Jun 2007
Posts: 3322


474.68 Dollars($)

Post     Post subject:

Hi Charles,

Welcome to the forum.

You can borrow loan amount upto $50,000 from your 401k plan for investing in your business. You will probably be charged a lower interest rate on the loan.
image
KAA

Guest






0.10 Dollars($)

Post     Post subject: 403b

I have $115,000 in my 403b, and I have taken a retirement at age 61 and 8 months. This retirement enables me to return and work for my employer for 5 months (spring semester teaching) every year for the next 5 years. Am I able to borrow from my account at this point without it being considered as a distribution?
image
Mini Profile  larry




Joined: 27 Jun 2007
Posts: 3322


474.68 Dollars($)

Post     Post subject:

Hi,

Welcome to the forum.

Your age is over 59 and 1/2 years. So you can withdraw from your 403b plan.
image

1, 2, 3, 4, 5, 6, 7, 8, 9, 10  Next  
Page 1 of 10

 

Page loaded in 1.116 seconds.