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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 shookshook,

The loan must be paid back over 5 years, although this can be extended for a home purchase. If you don't repay the loan, it will be considered as defaulted and you will be taxed on the outstanding balance, including an early withdrawal penalty if you are not at least 59 ½ years old.
Posted on: 05th Sep, 2010 10:15 pm
When you borrow against a 403b is who gets the interest?
Posted on: 07th Sep, 2010 05:32 pm
You pay the interest to yourself as it's your 403b account.
Posted on: 07th Sep, 2010 10:28 pm
I want to take an early cash out on my 403b account, I have a loan also, can I pay the loan off and take an early cash out with monies in acct?
Posted on: 18th Sep, 2010 08:40 pm
1. Can I take out 50K from each acct if I have one of both, or is it the two combined?
2. If I am unemployed but borrow for a home do I have to pay the amount back within 50 days?
3. If I am employed and age 56 but want to borrow against it to buy a home for cash, how long will I have to pay it back.
4. Do the answers to any of these change if I am married at the time, legally separated, or divorced?
Posted on: 19th Sep, 2010 09:21 am
Hi anonymous,

You can take out early cash out from your 403b account. However, you will be liable for paying 10% penalty if you're cashing out the account before you're 59 and ½ years of age.

To Esmeralda,

As far as I know, you'll be able to take out 50k from each account. Whether or not you are employed, you'll have to pay back the money within the said time period. If you're 56 years old, you will be liable for paying 10% penalty for taking out a loan from your 403B or 401K accounts. Your marital status won't affect the answer.

Posted on: 19th Sep, 2010 10:28 pm
will i have to pay a penalty for early withdrawal if i was terminated from work for medical reason being 58 years old and on disability
Posted on: 30th Sep, 2010 06:31 am
Hi nay,

Though you're on disability, if you withdraw the money from your 401b and 403b before you reach the age of 59 and 1/2 years, you will be liable for paying a tax penalty of 10%.

Posted on: 30th Sep, 2010 09:36 pm
If i already have a previous loan , can i still get another loan? Or can i take out enough money to pay off the previous loan?
Posted on: 03rd Nov, 2010 11:54 am
Welcome brownie,

It will be difficult for you to get another mortgage if you already have one. If you have equity in your existing property, then you can go for a cash out refinance and liquidate the equity in that home.
Posted on: 03rd Nov, 2010 09:45 pm
I borrowed 8.000.00 from 401 3 yrs ago, defaulted on it, paying taxes on it now. Can I borrow from 401 again now?
Posted on: 17th Nov, 2010 08:59 am
As you've already defaulted on the payments, I don't think you'll get another loan.
Posted on: 17th Nov, 2010 08:33 pm
I have two 403(b) accounts and an IRA. I would like to take a loan from one of the 403(b) accounts. Why can I not transfer funds from the IRA to the 403(b) to repay the loan?

John Estis

[Email address deleted as per forum rules. Thanks.]
Posted on: 21st Dec, 2010 09:41 am
I think it is not allowed that you use IRA funds to pay 403b loan. Moreover, you'll be liable for paying 10% taxes if you take out a loan from your 403b account before you're 59 and 1/2 years of age.
Posted on: 21st Dec, 2010 10:00 pm
want to borrow money from my 403b to buy a house .How todo it? Please help. Thanks.
Posted on: 23rd Dec, 2010 05:43 am
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