How to Borrow From a 403(b)

A 403(b) is a type of retirement plan available to employees of organizations such as churches, public education institutions, and non-profits. In some cases, 403(b) plans offer the option to borrow money from the account balance. When considering whether to borrow from a 403(b), contact with your plan administrator to determine your options.

Beginning The Process

Your 403(b) plan documents whether loans are allowed. If you can't find that information or need to clarify something, the contact information for your 403(b) plan administrator can be found on your account statement or other plan correspondence. The plan administrator will be able to determine whether or not a plan allows for borrowing; many 403(b) plans offer a borrowing option but some do not. To begin the loan process, you'll need to fill out a loan application. This application will document the borrowing date, the amount requested, a repayment schedule, and other loan terms.

IRS Rules

The Internal Revenue Service establishes limits on how much money can be borrowed from a 403(b) plan. The amount borrowed must be the smaller of 50 percent of the account balance or $50,000. If the account balance is less than $10,000, however, the owner can borrow the entire account balance.

Advantages

Borrowing from a 403(b) generally is easier than securing other types of loans. The employee effectively is borrowing his own money and does not have to go through an elaborate credit check process. All loan repayment amounts, including interest, are non-taxable and will go back to the account balance -- which will replenish the retirement nest egg.

Disadvantages

A loan from a 403(b) must be repaid with after-tax dollars. Failure to repay the loan on time will lead the IRS to treat the loan as a distribution, thus incurring income taxes and a withdrawal penalty of 10 percent if the borrower is younger than 59 1/2. If the 403(b) borrower leaves his job before the loan matures, he will be required to pay back that loan immediately.

Buying a Home

A home purchase is a permissible reason to borrow from a 403(b) plan according to the IRS. As a result, many plans allow account holders to borrow money from a 403(b) plan in order to fund the down payment. That's not the case everywhere, however. The rules pertaining to borrowing and withdrawals will be stipulated in the plan agreement, and employes are not obligated to allow loans for home purchases.

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