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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
Did I understand correctly that I cannot borrow against my STRS account? If I can, where do I start?
Posted on: 11th Jun, 2011 07:14 pm
Hi chaiken!

Welcome to forums!

As far as I know, if you withdraw your STRS account, you will lose all rights for potential future retirement benefits. So, it's better to not take out any money from that account.

Feel free to ask if you've further queries.

Sussane
Posted on: 12th Jun, 2011 10:30 pm
I'm wondering can I borrow money from my 403B Retirement Plan
Posted on: 06th Jul, 2011 12:18 pm
Hi Moesha!

Welcome to forums!

You can borrow money from your 403B retirement plan. However, if you're less than 59 and 1/2 years of age, then you may have to pay a penalty of 10% if you withdraw money from your 403B account.

Feel free to ask if you've further queries.

Sussane
Posted on: 06th Jul, 2011 11:34 pm
i took out a 40000 loan from my 403b account I made the first scheduled payment of 2400. a little over what i owed at the time the I refinanced my house so I paid back another 30,000 toward my 403b loan and hey still want to charge full interest for the whole 5 years even if i pay the total back with in a years time how can they do that
Posted on: 15th Jul, 2011 01:42 pm
kray, I don't think you need to pay the full interest for the whole 5 years as you've paid off the debts before the given time period.
Posted on: 15th Jul, 2011 11:34 pm
Does the $50,000 limit still appily when I am over 59 1/2?
Posted on: 31st Jul, 2011 05:11 pm
Dianna, I think the rule will not apply if you're over 59 and 1/2 years of age. Nevertheless, you should contact your employer and he may be able to assist you further.
Posted on: 31st Jul, 2011 10:20 pm
IF YOU ARE LAYED OFF BECAUSE OF LACK OFWORK ,NOT FIRED AND YOU ARE HAVING TROUBLE PAYING BACK THE LOAN ,SHOULD YOU DEFAULT.
Posted on: 13th Aug, 2011 08:15 pm
If I have a 403b and also a 401k would that allow me to borrow 100,000 (50,000 from each)assuming I have 100,000 balance in each account.
Posted on: 14th Aug, 2011 02:48 pm
Hi csaz!

Welcome to forums!

It is always better to not borrow from the retirement account and save it for the golden years. Nevertheless, if you're not 59 and 1/2 years of age and still borrow from these account, there are chances that you may have to pay a penalty.

Feel free to ask if you've further queries.

Sussane
Posted on: 14th Aug, 2011 09:21 pm
I work for the schools with a SERS plan. I need to borrow $5000 from my account. Can I do so? I know I'll have to pay penalties and taxes, probably, but does SERS offer this to employees in Ohio?
Posted on: 02nd Oct, 2011 07:10 am
Hi jennifertv,

Well, as far as I know, you may be able to withdraw the required money. However, it will be better if you could directly contact SERS and take their opinion in this regard. The contact details of SERS is as follows:
School Employees Retirement System of Ohio (SERS)
300 East Broad Street, Suite 100
Columbus, OH 43215-3746
Posted on: 02nd Oct, 2011 09:44 pm
Can I transfer money from my 401K to payback a 403B loan?
Posted on: 26th Oct, 2011 07:33 am
You may do so in order to payback your 403b loan but that won't be of much help.
Posted on: 26th Oct, 2011 09:45 pm
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