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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
I took out loans from a 403B, somehow when moving records got lost, never heard from them again till I remembered it, called the company. My surrender Value is $30,890.56, Accumulation Value $11,987.97. The loans were for $3,000, 2,000 and 2,900. They are now up to $18,935.91. I cannot afford to pay a tax person. Can the amount I owe be taken out of the $30,890.56? I will probably owe taxes on the entire amount. I cannot afford to pay the $18,935.91 and i don't know what the taxes would be on it. I make approximately $35,000 a year. Help
Posted on: 31st Mar, 2012 12:54 pm
I guess I am screwed then. I figure I might be able to pay myself back, I am almost 64 so I can file for my benefit from that and use what I get to make arrangements for the monthly payment. Or... since my health is crappy (open heart surgery, pacemaker) i can ignore it and hope for the inevitable.
Posted on: 31st Mar, 2012 01:10 pm
You may file for the benefits. However whether or not your requests will be accepted will depend upon the company.
Posted on: 02nd Apr, 2012 03:38 am
I have $32,000 in unpaid loans from my 403(b); I filed for bankruptsy in late March, and don't have the funds to keep paying my loans back. If I defalt, because of the bankruptsy do I have to pay taxes on the unpaid amounts?
Posted on: 19th Jun, 2012 05:52 pm
Hi Yar,

Your debts will get discharged in your bankruptcy filing. So, you won't be liable for paying anything unless you reaffirm any of your debts.
Posted on: 19th Jun, 2012 11:47 pm
I have a 401, a403(b) retirement plan with a previous employer, I left in Dec 2010, can I still get a loan from my plan?
Posted on: 21st Nov, 2012 09:35 am
Hi Guest!

Welcome to forums!

As far as I know, if you are no longer with the employer, you will likely not be able to take a loan. There has only one situation where I have seen a employee no longer with a company was able to keep an open loan at a former employer's plan. She made payments to the plan via check as if it were a regular loan.

Happy Thanksgiving!! :)

Feel free to ask if you've further queries.

Sussane
Posted on: 21st Nov, 2012 09:13 pm
I have a loan on a 403b and I will be turning 59 1/2 this year. Will having the loan on the 403b keep me from withdrawing money from the account or do I have to pay off the loan first? Can I withdraw from the 403b to pay off the loan?
Posted on: 18th Mar, 2013 08:37 pm
Hi Stevie!

Welcome to the forums!

As far as I know, you will have to pay off the loan on the 403b before withdrawing money from that account.

Feel free to ask if you've further queries.

Sussane
Posted on: 18th Mar, 2013 10:03 pm
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