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

Posted on: 04th Apr, 2004 11:09 pm
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:
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Related Forum Discussions
requesting loan from my 401k plan as soon as possible.
Posted on: 09th Jan, 2006 05:02 pm
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.

Posted on: 09th Jan, 2006 07:27 pm
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.
Posted on: 16th Feb, 2006 06:12 am
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.

Posted on: 16th Feb, 2006 06:20 am
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,
Posted on: 16th Feb, 2006 09:06 am

Why do you think you can't qualify for a regular mortgage?
Posted on: 16th Feb, 2006 09:36 am
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.
Posted on: 27th Apr, 2006 04:31 pm
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,
Posted on: 27th Apr, 2006 05:06 pm
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.
Posted on: 27th Apr, 2006 05:15 pm

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.

Posted on: 27th Apr, 2006 05:33 pm
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?
Posted on: 13th Sep, 2007 06:13 pm
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.
Posted on: 13th Sep, 2007 10:48 pm
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?
Posted on: 16th Jul, 2008 05:04 pm

Welcome to the forum.

Your age is over 59 and 1/2 years. So you can withdraw from your 403b plan.
Posted on: 17th Jul, 2008 03:34 am
if i already have an outstanding loand on my 401k, can i still close my account minus penalties or does the loan have to paid off first
Posted on: 30th Jul, 2008 05:57 pm
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