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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
Is all the interest charge on your loan returned to your account since it is your money you are borrowing from and you are paying an annual fee for administrative processing of that loan?
Posted on: 23rd Apr, 2010 09:13 am
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.
Posted on: 23rd Apr, 2010 10:59 pm
How the process go if in case i make a loan can you tell me or first step to do. Cause i plan to make loan this month.
Posted on: 26th Apr, 2010 02:19 am
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.
Posted on: 28th Apr, 2010 03:14 am
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.
Posted on: 18th Jul, 2010 11:13 am
Hi CC,

As far as I know, if you take out a loan from 403(b), then youl 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.
Posted on: 19th Jul, 2010 12:27 am
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?
Posted on: 10th Aug, 2010 07:11 am
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
Posted on: 10th Aug, 2010 10:27 pm
how and who do you go to to take a loan out against your 403 B? Is it the company that holds the 403 B or is it a bank?
Posted on: 21st Aug, 2010 03:08 pm
As far as I know, you need to contact the company in order to get a 403b loan.
Posted on: 22nd Aug, 2010 09:29 pm
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.
Posted on: 23rd Aug, 2010 01:18 am
Though you file bankruptcy, I think you would be liable for paying the 10% tax penalty.
Posted on: 24th Aug, 2010 03:27 am
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
Posted on: 27th Aug, 2010 09:25 am
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
Posted on: 27th Aug, 2010 09:55 pm
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?
Posted on: 04th Sep, 2010 08:06 am
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