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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
Hi richie.

The loan needs to be paid first. BTW why do you want to close the account. Why do you want to close the Retirement Account?
Posted on: 31st Jul, 2008 05:28 am
A coworker defalted on a 403b loan and the amount of the loan was reported as income to the IRS. The company will no longer accept payments and tell her she has to pay the loan back in full and she will still have to pay the 10% penalty along with the income tax. Is this correct?
Posted on: 28th Aug, 2008 01:17 pm
Hi s.biggs,

When a person defaults on a 403b loan, the unpaid debt is considered as an early distribution and hence one has to pay taxes and penalty if he's under 59 and 1/2 years of age.

Take Care
Posted on: 29th Aug, 2008 03:29 am
a friend of mine is getting ready to retire soon. He is over 59 and 1/2 years old. 403b totals around 160,000. wants to borrow against the account around 30,000 to pay off bills. Any suggestions on how he could invest his money to make it last as long as possible and live off some of the interest...

thanks for blog
Posted on: 09th Sep, 2008 11:18 pm
You mean you'd like to invest from your 403b plan account after paying off the bills? You can invest in real estate or mutual funds. But I suppose you should talk to a financial advisor in this regard.
Posted on: 12th Sep, 2008 04:53 am
i am 60, still working. i am afraid of the money market. I want to get mu 403B out and pay bills. What kind of penalty will I face? And do I have to pay it back?
Posted on: 25th Sep, 2008 06:49 pm
Hi Sue!

As far as I know, you can take loans on 403B. However, you will be charged interest on that. Failure to pay it will lead to penalty as well.

Thanks,

Jerry
Posted on: 26th Sep, 2008 03:30 am
Iwould take a loan from 403(b)plan
Posted on: 04th Oct, 2008 10:30 am
Can you contribute to bot an IRA and 403b during the same ...for the same year?
Posted on: 07th Oct, 2008 04:26 am
Hi Jack!

Yes, you can contribute to the both simultaneously. You can deduct the IRA contribution or not will depend on a variety of factors. However, if you can contribute to the Roth IRA will depend on your income.

Thanks,

Jerry
Posted on: 11th Oct, 2008 01:44 am
can I just requesting a loan from my 401k plan as soon as possible?
Posted on: 14th Oct, 2008 11:20 am
Yes, you can definitely take a loan on your 401K loan. But there are certain criteria attached to it. Go through to the above link to know more about it.

Thanks,

Jerry
Posted on: 15th Oct, 2008 03:23 am
can i borrow maney against my strs retirement account. i am desperate for cash and i don't want to resign my position to gain the cash
Posted on: 19th Oct, 2008 02:05 pm
Hi j!

Normally you cannot borrow from you retirement account when you are working and I don't think you can consider this as a collateral. You can check the following link for a discussion on the strs retirement account.

http://www.mortgagefit.com/401k-403b-loans.html

Hope this helps you.

Thanks.
Posted on: 20th Oct, 2008 12:40 am
my place of employment did away with our retirement plan as of dec.31,2007 and we are able to take the ammount minus 20% for federal taxes. Is this a good idea I want to use some of the money to pay down my mortgage and save the rest
Posted on: 20th Oct, 2008 04:24 pm
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