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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 ishmael,

You can take out your money from 403b account without penalty when you are 59.5 years of age. You will also be able to take out money from your account if you retire before 55 years of age. You can also get your money if you become disabled as defined by IRS code 72(m) (7). You can also take money as a loan from your 403b account.

Posted on: 11th May, 2009 11:09 pm
ishmael brana

Since 403b plans were created to help you save for retirement, there may be stiff penalties for withdrawing money early. If you do, you owe:

Income taxes on the total withdrawal

A 10% penalty if youre younger than 59
20% federal income tax withholding unless the entire amount is rolled over to another qualified retirement plan or IRA
Posted on: 31st May, 2009 02:58 pm
I have a 403B account with $25000 in it. I am 60 years 8 month old. Fo I have the right to withdraw $5000?
Posted on: 28th Aug, 2009 08:37 pm
Hi Guest!

Welcome to forums!

You can withdraw the assets from your 403B account when you are 59.5 years of age. As you're more than 60 years old, I don't think you would face issues in withdrawing the money.

Feel free to ask if you've further queries.

Posted on: 30th Aug, 2009 09:15 pm
I have a 401K account valued currently at around $250,000. I won't be 59 1/2 until January of next year. I've filed for divorce - is it wise to borrow against my 401K, I would use the money as a down payment on a condo. My current husband and I have a home valued at %500,000+on a beautiful lake in MI, but it is not selling. What would you do?
Posted on: 12th Oct, 2009 04:07 am
Hi Michroise!

Welcome to forums!

If you withdraw the money from your 401(k) account now, you may have to pay a penalty. You'll have to pay 10% additional tax for an "early distribution". If you can afford to pay the taxes, then you can go for a 401k withdrawal.

However, you can go for a hardship withdrawal if you are in an immediate and severe financial crisis.

Feel free to ask if you've further queries.

Posted on: 12th Oct, 2009 09:12 pm
i lost my job and only have about $4000 in my account. Is there a way to borrow that money?
Posted on: 26th Oct, 2009 11:51 am
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.

Posted on: 26th Oct, 2009 08:52 pm
If i pay back a 401k loan when can I borrow against it again? :?:
Posted on: 05th Nov, 2009 06:02 pm
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.
Posted on: 05th Nov, 2009 08:53 pm
I took out a loan against my retirement over 7 years ago. I had to file bankruptcy and was not able to pay it back. My total balance now is $17,000 but my loan balance is now $12,000. What will happen if I don't pay it back?
Posted on: 13th Nov, 2009 06:26 am
Hi kat,

If you have taken a loan against your 401k and quit your job, you will be asked to repay the loan within 60 days of termination of job. If you cannot pay off the loan, a 10% penalty will be charged on the balance of the funds, if you are under 59 and 1/2 years. You will also have to pay income taxes. Depending on your employer, you might not be allowed to contribute to your funds until you pay off the outstanding loan. Your employer can also deduct payments from your paycheck.


Posted on: 19th Nov, 2009 03:18 am
I took out all the money in my 403b mutual fund account to help pay for tuition. I was unable to continue school and I'm not able to go back to work due to a leave of abscence. Can the repayment of a 403b loan and taxes be considered as undue hardship (along with student loan payments, forclosure payments and other depts) I'm 20 thousand leagues under the sea!
Posted on: 05th Jan, 2010 07:30 pm
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.
Posted on: 06th Jan, 2010 02:24 am
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'.
Posted on: 11th Jan, 2010 10:18 pm
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