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

When you are in need of cash and have no other options to get the required amount, [b:ed9d5ded73]401(k) and 403(b) plan loans[/b:ed9d5ded73] 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.

[b:ed9d5ded73]Payments against 401(k) or 403(b) loans:[/b:ed9d5ded73]
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 [b:ed9d5ded73]pros and cons[/b:ed9d5ded73] of these loans.

Below are the pros of getting a 401k or 403b loan:
[list:ed9d5ded73][*:ed9d5ded73] 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.

[*:ed9d5ded73]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.[/list:u:ed9d5ded73]
The possible consequences of taking out a loan from your 401k and 403b Plan accounts are:
[list:ed9d5ded73][*:ed9d5ded73] 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.

[*:ed9d5ded73]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.

[*:ed9d5ded73]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. [/list:u:ed9d5ded73]
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:

[list:ed9d5ded73][*:ed9d5ded73]Retirement Plans[/list:u:ed9d5ded73]

Related Articles
Related Forum Discussions
smith.sussane's picture
smith.sussane | Joined: September 18, 2008 09:57 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi chaiken!

Welcome to forums!

As far as I know, if you withdraw your STRS account, you will lose all rights for potential future retirement benefits. So, it's better to not take out any money from that account.

Feel free to ask if you've further queries.

Sussane

Like | Dislike | Share | Posted: Sun, 06/12/2011 - 22:30

jameshogg's picture
jameshogg | Joined: December 20, 2005 02:58 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi donnabellee,

Borrowing money from your 401k account should be your last resort. I can understand that it could be tempting to borrow money from your 401k account after you lost your job but you would have to pay penalties for any withdrawal before you are 59 and 1/2 years of age.

Thanks

Like | Dislike | Share | Posted: Mon, 10/26/2009 - 20:52

jenkin7's picture
jenkin7 | Joined: June 4, 2007 11:02 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Blue,

It does not look like the repayment of 403b loan and the taxes paid on it will be considered as undue hardship. A 403b plan is a tax-deferred plan meant for your retirement. You are not supposed to withdraw money from your 403b. In case, you have to withdraw money from your 403b, you will have to repay it. I don't think the repayment of the 403b will be considered as 'undue hardship'.

Like | Dislike | Share | Posted: Mon, 01/11/2010 - 22:18

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Can i pay the tax and penalty on a default 403b loan separate from regular w2 taxes.

Like | Dislike | Share | Posted: Sat, 02/06/2010 - 07:07 | Post subject:

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I don't think it will be considered as a hardship discharge. However, you can speak to an attorney and he'll let you know your options.

Like | Dislike | Share | Posted: Wed, 01/06/2010 - 02:24

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

If i pay back a 401k loan when can I borrow against it again? :?:

Like | Dislike | Share | Posted: Thu, 11/05/2009 - 18:02

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Can you borrow against a 403B plan if you retired from your position with the past year

Like | Dislike | Share | Posted: Fri, 12/31/2010 - 10:42 | Post subject:

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

will i have to pay a penalty for early withdrawal if i was terminated from work for medical reason being 58 years old and on disability

Like | Dislike | Share | Posted: Thu, 09/30/2010 - 06:31 | Post subject:

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I have an out standing loan on my 403b account. My wife's illiness and medical bills are forcing us to look at bankruptcy. Does bankruptcy offer an protection on the 403b loan from the 10% tax penalty? My wife and I are under 59 1/2 but she is now on full disibality.

Like | Dislike | Share | Posted: Mon, 08/23/2010 - 01:18 | Post subject:

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

want to borrow money from my 403b to buy a house .How todo it? Please help. Thanks.

Like | Dislike | Share | Posted: Thu, 12/23/2010 - 05:43 | Post subject:

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

here is one for you. my wife is 591/2 we rolled her annunity over into another one. we had a loan for 20 grand. we paid the loan off plus taxes so we would be free and clear. do we have to declare this as income

Like | Dislike | Share | Posted: Sat, 02/06/2010 - 08:24 | Post subject:

jenkin7's picture
jenkin7 | Joined: June 4, 2007 11:02 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi anonymous,

The interest you pay on your 401K loan is repaid back to your 401K account. This means you do not have the pay the interest to an outsider. You are merely transferring the money from your one pocket to another.

However, the loan does not come free of cost. You need to pay an origination fee which could be as much as 7.5% of the loan. In addition there is an annual maintenance fee.

Like | Dislike | Share | Posted: Fri, 04/23/2010 - 22:59

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

There is no time limit for borrowing from the 401k. However, if you borrow money before 59 and 1/2 years of age, then you'll have to pay penalties.

Like | Dislike | Share | Posted: Thu, 11/05/2009 - 20:53

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I want to take an early cash out on my 403b account, I have a loan also, can I pay the loan off and take an early cash out with monies in acct?

Like | Dislike | Share | Posted: Sat, 09/18/2010 - 20:40 | Post subject:

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Between my wife and I we have 40000+ in our mutual 403b (Both of us are Teachers). We have 38000 in credit card debt which we pay 300 in finance charges a month. Should we take out loan on 403b?

Like | Dislike | Share | Posted: Tue, 04/19/2011 - 09:43 | Post subject:

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

What are the consequences of defaulting on my 403B plan? I took a 30K loan and have repaid approx. 5K. With the economy as it is the 1,741.74 qtrly.
payment is killing me.

Like | Dislike | Share | Posted: Wed, 01/20/2010 - 11:45 | Post subject:

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

May I take my money from the 403b account when I turn 59 1/2 without a penalty? I know I will pay taxes on it (twice). but is that money available age 591/2?

Like | Dislike | Share | Posted: Tue, 08/10/2010 - 07:11 | Post subject:

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

hi.., could u halpe me with take personal loan around 150,000$.....

Like | Dislike | Share | Posted: Thu, 04/01/2010 - 06:12 | Post subject:

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

1. Can I take out 50K from each acct if I have one of both, or is it the two combined?
2. If I am unemployed but borrow for a home do I have to pay the amount back within 50 days?
3. If I am employed and age 56 but want to borrow against it to buy a home for cash, how long will I have to pay it back.
4. Do the answers to any of these change if I am married at the time, legally separated, or divorced?

Like | Dislike | Share | Posted: Sun, 09/19/2010 - 09:21 | Post subject:

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

When you borrow against a 403b is who gets the interest?

Like | Dislike | Share | Posted: Tue, 09/07/2010 - 17:32 | Post subject:

jameshogg's picture
jameshogg | Joined: December 20, 2005 02:58 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi sunshine,

In order to borrow money from your 403b account, you will have to contact the bank where you've created the account. However, it should be kept in mind that this is your retirement savings. Unless you've exhausted all other means of getting a loan, don't go for this type of loan.

Thanks

Like | Dislike | Share | Posted: Thu, 12/23/2010 - 20:12

smith.sussane's picture
smith.sussane | Joined: September 18, 2008 09:57 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi BERJON!

Welcome to forums!

You will be able to borrow money from your 403B plan if you're retired.

Sussane

Like | Dislike | Share | Posted: Fri, 12/31/2010 - 21:53

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I have 12,000 credit card debt...due to the market should I pay off the credit cards and get the cash from my 403B

Like | Dislike | Share | Posted: Fri, 08/27/2010 - 09:25 | Post subject:

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

It will have a negative affect on your credit report. You will have to pay it off in order to get rid of the dues.

Like | Dislike | Share | Posted: Mon, 01/10/2011 - 21:29

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hello,

I was wondering if it is possible to take a home down payment loan from a open 403b account from a previous employer? Any concerns?

Like | Dislike | Share | Posted: Thu, 04/01/2010 - 08:36 | Post subject:

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I have about 25,000 in my 403b. would like to borrow half of that for a personal loan. is it better to do this from retirement account itself or borrow from outside creditors using this as collateral? Thanks.

Like | Dislike | Share | Posted: Sun, 07/18/2010 - 11:13 | Post subject:

jameshogg's picture
jameshogg | Joined: December 20, 2005 02:58 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi nay,

Though you're on disability, if you withdraw the money from your 401b and 403b before you reach the age of 59 and 1/2 years, you will be liable for paying a tax penalty of 10%.

Thanks

Like | Dislike | Share | Posted: Thu, 09/30/2010 - 21:36

jameshogg's picture
jameshogg | Joined: December 20, 2005 02:58 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Tim,

If you take out a loan on your 403b before you're 59 and 1/2 years of age, then you may have pay a penalty.

Thanks

Like | Dislike | Share | Posted: Tue, 04/19/2011 - 21:58

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Can I use 403b to pay for roof repair without penalty?
Thanks,
Rachael

Like | Dislike | Share | Posted: Mon, 04/25/2011 - 17:50 | Post subject:

jameshogg's picture
jameshogg | Joined: December 20, 2005 02:58 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi anonymous,

You can take out early cash out from your 403b account. However, you will be liable for paying 10% penalty if you're cashing out the account before you're 59 and ½ years of age.

To Esmeralda,

As far as I know, you'll be able to take out 50k from each account. Whether or not you are employed, you'll have to pay back the money within the said time period. If you're 56 years old, you will be liable for paying 10% penalty for taking out a loan from your 403B or 401K accounts. Your marital status won't affect the answer.

Thanks

Like | Dislike | Share | Posted: Sun, 09/19/2010 - 22:28

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

dammn what do i have to do to get a loan

Like | Dislike | Share | Posted: Mon, 04/04/2011 - 15:24 | Post subject:

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I have a loan on a 403b and I will be turning 59 1/2 this year. Will having the loan on the 403b keep me from withdrawing money from the account or do I have to pay off the loan first? Can I withdraw from the 403b to pay off the loan?

Like | Dislike | Share | Posted: Mon, 03/18/2013 - 20:37 | Post subject:

smith.sussane's picture
smith.sussane | Joined: September 18, 2008 09:57 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Stevie!

Welcome to the forums!

As far as I know, you will have to pay off the loan on the 403b before withdrawing money from that account.

Feel free to ask if you've further queries.

Sussane

Like | Dislike | Share | Posted: Mon, 03/18/2013 - 22:03

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

You pay the interest to yourself as it's your 403b account.

Like | Dislike | Share | Posted: Tue, 09/07/2010 - 22:28

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

i defaulted on my 403 loan due to financial hardship how will that affect my credit ratin gand what do i need to do to get it back on track

Like | Dislike | Share | Posted: Sun, 01/09/2011 - 16:58

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Dianna, I think the rule will not apply if you're over 59 and 1/2 years of age. Nevertheless, you should contact your employer and he may be able to assist you further.

Like | Dislike | Share | Posted: Sun, 07/31/2011 - 22:20

smith.sussane's picture
smith.sussane | Joined: September 18, 2008 09:57 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi staggard!

Welcome to forums!

If your age is below 59 and 1/2 years, then you'll be liable for paying penalty.

Sussane

Like | Dislike | Share | Posted: Mon, 04/25/2011 - 22:12

savior70's picture
savior70 | Joined: March 25, 2009 05:14 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi dinky,

If you intend to take a loan out of your 401K account, you need to first review your company's 401K plan documents and the implications of taking a loan out of it. IRS does allow you to take a loan out of your 401k account, but your company is not legally bound to offer you the loan. It completely depends on company's 401k policy.

If your company does allow you to take a 401K loan, you need to fill out a form which you can get from the HR dept. or the company website. After filling it out, you may have to submit the form to a third-party, and not necessarily where you got the application form. No credit checks will be required as you are taking out your own money. Once you get the loan you will have to sign a promissory note which will have details of the loan term, interest rate, monthly payment, etc.

Like | Dislike | Share | Posted: Wed, 04/28/2010 - 03:14

savior70's picture
savior70 | Joined: March 25, 2009 05:14 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi SHAARON,

If you take a loan against your 403b retirement account, you are likely to be prohibited from participating in the plan till the time you repay the loan in full. In case, your employer matches the contributions made by you, it is likely to stop as well. So, the sooner you pay off the loan in full, the better it is.

Like | Dislike | Share | Posted: Wed, 03/03/2010 - 01:47

adonis's picture
adonis | Joined: October 22, 2005 05:04 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi CC,

As far as I know, if you take out a loan from 403(b), then you’ll have to repay it within 5 years. If you default on the loan payments, the unpaid balance will be treated as an early distribution from your 403(b) and you'll be liable for paying 10% penalty. If you feel that you won't be able to pay off the dues back, then it's better to take out the loan from an outside creditor.

Like | Dislike | Share | Posted: Mon, 07/19/2010 - 00:27

jenkin7's picture
jenkin7 | Joined: June 4, 2007 11:02 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Mike,

If you take out a 403b loan, you will not be able to participate in your plan till the time you repay the loan. In case you cannot pay off the loan, you will have to pay income tax and pay a penalty of 10% for the early withdrawal.

Like | Dislike | Share | Posted: Wed, 01/20/2010 - 22:44

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

It will be better to go for the option of cashing out the amount.

Like | Dislike | Share | Posted: Sun, 02/20/2011 - 21:28

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Can you borrow from funds in 403b account after you have left employer?

Like | Dislike | Share | Posted: Thu, 02/04/2010 - 17:55 | Post subject:

jameshogg's picture
jameshogg | Joined: December 20, 2005 02:58 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi kmoore,

As far as I know, you would be able to take out money from the 403b account when you turn 59 1/2. You won't have to pay any penalty.

Thanks

Like | Dislike | Share | Posted: Tue, 08/10/2010 - 22:27

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

If i already have a previous loan , can i still get another loan? Or can i take out enough money to pay off the previous loan?

Like | Dislike | Share | Posted: Wed, 11/03/2010 - 11:54

smith.sussane's picture
smith.sussane | Joined: September 18, 2008 09:57 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi terence!

Welcome to forums!

You should contact the human resource department if your organization and request for the forms to apply for the 401k loan. The forms will be reviewed and you will be able to get a loan provided you meet all the required criteria.

Feel free to ask if you've further queries.

Sussane

Like | Dislike | Share | Posted: Mon, 04/04/2011 - 22:27

jenkin7's picture
jenkin7 | Joined: June 4, 2007 11:02 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi lorri,

You can withdraw some money from your 403b account. But if you withdraw money from it before you turn 59 and 1/2, you will be subject to income tax plus a 10% penalty. Thus, you will lose some amount of money for this early withdrawal. So, you should not withdraw money from your 403b account unless you are in desperate need for the money.

Like | Dislike | Share | Posted: Fri, 03/26/2010 - 00:33

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I have two 403(b) accounts and an IRA. I would like to take a loan from one of the 403(b) accounts. Why can I not transfer funds from the IRA to the 403(b) to repay the loan?

John Estis

[size=9:4387d72faa][color=Red:4387d72faa][Email address deleted as per forum rules. Thanks.][/color:4387d72faa][/size:4387d72faa]

Like | Dislike | Share | Posted: Tue, 12/21/2010 - 09:41 | Post subject:

smith.sussane's picture
smith.sussane | Joined: September 18, 2008 09:57 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Guest!

Welcome to forums!

If you have the monies, then you can pay off the credit card debts with that. You can then take a cash out from your 403b account.

Sussane

Like | Dislike | Share | Posted: Fri, 08/27/2010 - 21:55

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I defaulted on a 26000.00 loan 10 years ago and now I need to borrow on my retirement again. My retirement company says I can't because the interest on the loan has come to over 50000. How can this be?

Like | Dislike | Share | Posted: Sat, 09/04/2010 - 08:06 | Post subject:

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