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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
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.
Posted on: 20th Jan, 2010 11:45 am
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.
Posted on: 20th Jan, 2010 10:44 pm
Can you borrow from funds in 403b account after you have left employer?
Posted on: 04th Feb, 2010 05:55 pm

You can borrow from your 403b program even if you have left your employer. You can have access to your 403b account by putting your money in your new employer's 403b program. You money in the 403b account can be rolled into your IRA accounts as well. You can also leave the money where it is. However, if your balance is below $5k, your employer may ask you to move the money.
Posted on: 05th Feb, 2010 01:50 am
Can i pay the tax and penalty on a default 403b loan separate from regular w2 taxes.
Posted on: 06th Feb, 2010 07:07 am
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
Posted on: 06th Feb, 2010 08:24 am
Posted on: 09th Feb, 2010 03:54 pm

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.
Posted on: 03rd Mar, 2010 01:47 am
i want to close my 403b because i need money, iam a single mom, i work
for the school system. what must i do.thank again dyanne
Posted on: 09th Mar, 2010 11:56 am
Hi dyanne,

If you are under the age of 59 and 1/2 and you close your 403b account, you will have to pay regular income tax on the amount of money you take out. Apart from the income tax, you will also have to pay penalty of 10%. So, all together you will end up losing more than 40% of the money if you withdraw early and close your 403b account. So, it's not a very good idea to close your 403b account before you turn 59 and 1/2 years. If you need money, try and borrow it from any of your relatives or if possible, get a personal loan. Closing your 403b account should be your last option.


Posted on: 11th Mar, 2010 01:38 am
i have been on unemployment and time is running out with no job prospects. i also am in need of a car since the bus doesn't run my way. i have a 403b from an old job and i was wondering if i could withdraw some of it to help me out. I have tried to deal with TIAA-CREF before and all they do is give me the run-around with answers etc. thank you, lorri
Posted on: 25th Mar, 2010 10:36 am
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.
Posted on: 26th Mar, 2010 12:33 am
hi.., could u halpe me with take personal loan around 150,000$.....
Posted on: 01st Apr, 2010 06:12 am

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?
Posted on: 01st Apr, 2010 08:36 am
Hi Lina,

It is quite difficult for you to get a personal loan of such a large amount as $150,000. Personal loans are unsecured loans and lenders do not want to offer such large amount of loans without security. However, you may get a personal loan of smaller amount, given your credit scores are good.

Hi Billy,

You can take out money from your 403b account to make a down payment on your primary residence. But you will be subject to a penalty of 10% and income taxes on the amount withdrawn if you are under the age of 59½ years. However, this withdrawal would be considered as a hardship withdrawal and you will have to prove that you have no other resources to make the down payment.

You need to talk to your lender regarding this. If you are taking out a loan from your retirement account, the lender will consider it differently. Though you are borrowing your own money, you still need to repay it. It can affect your Debt to Income (DTI) ratio and your chances of qualifying for the loan. You also need to consult a tax professional before withdrawing money from your 403B account.


Posted on: 02nd Apr, 2010 02:32 am
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