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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 Guest!

You can either pay off your mortgage with that money or you can also rollover your 401k plan with your new employer if any or you can roll it over with the IRA.

Thanks.
Posted on: 20th Oct, 2008 11:26 pm
I've defaulted on my 401b loan, can I use money that remains in my 403b account to pay off the defaulted loan?
Also, my employer will no longer allow me to have 403b deposits made to my current carrier, they claim it's mandatory to switch to the company of their choice. What options do I have with the money in my existing 403b account?
Posted on: 01st Dec, 2008 12:42 pm
Hi Dyanne

As far as I know, people are allowed to take loans on their 403(b) plans. However, you will have to repay the loan in at least quarterly installments. If you are buying a primary residence, then you have 30 years to pay it back but if you are taking loan for other reasons, then you must pay the loan back within a 5-year period.

As far as your second question is concerned, I haven't heard of anything like "switching to the company of their choice".

Thanks
Posted on: 02nd Dec, 2008 01:12 am
where can i get one?
Posted on: 16th Dec, 2008 09:15 am
Hi Edmund Anderson,

Check out a sample 403b withdrawal form. You can show this form to your 403b plan administrator and check whether it is applicable in your case.

Thanks
Posted on: 16th Dec, 2008 11:47 pm
Is it true that you can borrow off your 403b plan once every calender year even if you have a small loan out already for 2,400.00
Posted on: 16th Jan, 2009 08:23 am
Hi ricooo,

Have you taken the loan from the 403(b) account?

Thanks
Posted on: 16th Jan, 2009 08:36 pm
when I contacted the lincoln financial group who is investing my money of th 403B , they refused to issue the Loan even it is to pay off my daughter's school loan as her income is not enough to pay it snd Fannie May charges 6.8% . How can I make them accept .. Regards
Posted on: 07th Feb, 2009 07:41 am
Negotiating with them is the option for you. You will have to convince them as to why you need the loan.
Posted on: 13th Feb, 2009 12:59 am
Hi. I am in the process of buying a home. With the new FHA guidelines, I have only saved the amount to serve as the down payment. I just found out that I will need to come to the table with an additional 5k down for closing costs. Closing is scheduled for March 27th. What is your opinion on boroowing this amount from my STRS which has about 65k in it? I am tenured and have been teaching in my current district for 9 years.
Posted on: 03rd Mar, 2009 10:00 am
As you will be teaching in the same district for some more time, I think you will be able to borrow a certain amount from your STRS.
Posted on: 03rd Mar, 2009 08:36 pm
i have a balance of $2100 on the loan and have $8700 in the account.what will happen if i default,also does defaulting go against a persons credit history.thank you
Posted on: 12th Mar, 2009 11:58 am
does it go against my credit
Posted on: 12th Mar, 2009 12:03 pm
Hi lisalucy,

If you default on the 403b loan, the unpaid balance will be treated as an early distribution from your 403(b) and will lead to taxes and a 10% penalty. As far as I know, if you default 403b loan, your credit will be affected.

Thanks
Posted on: 12th Mar, 2009 09:29 pm
what happens when i take out my money from my 403b would i get the full amount or no when im 60 years of age
Posted on: 11th May, 2009 06:28 pm
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