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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 sunshine,

In order to borrow money from your 403b account, you will have to contact the bank where you've created the account. However, it should be kept in mind that this is your retirement savings. Unless you've exhausted all other means of getting a loan, don't go for this type of loan.

Thanks
Posted on: 23rd Dec, 2010 08:12 pm
Can you borrow against a 403B plan if you retired from your position with the past year
Posted on: 31st Dec, 2010 10:42 am
Hi BERJON!

Welcome to forums!

You will be able to borrow money from your 403B plan if you're retired.

Sussane
Posted on: 31st Dec, 2010 09:53 pm
i defaulted on my 403 loan due to financial hardship how will that affect my credit ratin gand what do i need to do to get it back on track
Posted on: 09th Jan, 2011 04:58 pm
It will have a negative affect on your credit report. You will have to pay it off in order to get rid of the dues.
Posted on: 10th Jan, 2011 09:29 pm
I am 66 and plan to retire in one year. I will have a substantial employer pension and social security benefit so I do not anticipate needing additonal income in the near future. I also have two supplemental 403 (b)retirement accounts to which I have contributed over the years (no employer contributions are in these accounts). The combined totals in these two accounts is approximately $500,000. I just recently signed a contract to purchase a house which I will be paying in cash. I plan to take the money from the above 403b SRR accounts. My question is: Would it be better for me to take a loan from the 403b and thus defer the tax liability associated with a cash out? Or would it be better to cash out for the amount of money that I need?
Posted on: 20th Feb, 2011 10:06 am
It will be better to go for the option of cashing out the amount.
Posted on: 20th Feb, 2011 09:28 pm
I borrowed approx 5000 from my 403 to help an adult child (student) pay his college tuition. he lived in my home, unemployed. We defaulted on the loan after 1 payment and received a 1099 form form for 2010. Do I have to pay the 10% since it was for tuition of an unemployed child?
Posted on: 15th Mar, 2011 07:20 am
As far as I know, you will be liable for paying the 10% tax if you've withdrawn the money from your 403b account before you're 59 and 1/2 years of age.
Posted on: 15th Mar, 2011 09:53 pm
dammn what do i have to do to get a loan
Posted on: 04th Apr, 2011 03:24 pm
Hi terence!

Welcome to forums!

You should contact the human resource department if your organization and request for the forms to apply for the 401k loan. The forms will be reviewed and you will be able to get a loan provided you meet all the required criteria.

Feel free to ask if you've further queries.

Sussane
Posted on: 04th Apr, 2011 10:27 pm
Between my wife and I we have 40000+ in our mutual 403b (Both of us are Teachers). We have 38000 in credit card debt which we pay 300 in finance charges a month. Should we take out loan on 403b?
Posted on: 19th Apr, 2011 09:43 am
Hi Tim,

If you take out a loan on your 403b before you're 59 and 1/2 years of age, then you may have pay a penalty.

Thanks
Posted on: 19th Apr, 2011 09:58 pm
Can I use 403b to pay for roof repair without penalty?
Thanks,
Rachael
Posted on: 25th Apr, 2011 05:50 pm
Hi staggard!

Welcome to forums!

If your age is below 59 and 1/2 years, then you'll be liable for paying penalty.

Sussane
Posted on: 25th Apr, 2011 10:12 pm
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