How to Borrow From 403b

Not repaying a 403(b) plan loan leads to extra taxes and penalties.

Not repaying a 403(b) plan loan leads to extra taxes and penalties.

A 403(b) plan is similar to a 401(k) plan but is offered only to employees of certain non-profit groups. If you need money from your 403(b) plan, before you take a distribution, consider a 403(b) plan loan. Taking a loan allows you to access the money in your plan without taking a permanent distribution, thus avoiding taxes and early withdrawal penalties. However, not all 403(b) plans offer loans, so you have to talk to your 403(b) plan administrator to find out if your plan allows loans.

Loan Requests

To apply for a loan from your 403(b) plan, you need to talk to your 403(b) plan administrator. You'll receive a loan application that generally requires your identifying information, the fund from which you want to take the loan, the amount you want to borrow and the repayment term. If you're married, your 403(b) plan may require your spouse's signature as well. When you submit the application, the plan administrator will disburse the funds to you.

Loan Size

The IRS limits how much you can borrow from your 403(b) at any one time. Generally, you're limited to the smaller of 50 percent of your vested account balance or $50,000. However, if you have less than $10,000 in your account, you can borrow up to your account balance. For example, if your vested account balance is $88,000, you could borrow up to $44,000 from your 403(b) plan. Alternatively, if your balance was only $9,000, you could borrow the full $9,000.

Loan Repayment Terms

Your 403(b) plan must charge you a reasonable rate of interest on your loan. However, the interest you pay goes back into your account, so in essence you're paying yourself interest. The downside is that you're losing out on whatever returns you would have earned if the money had been in the 403(b) account. You generally have up to five years to repay the loan, but you have to make at least quarterly payments. However, if you leave the company, your employer can require you to pay the balance of your loan immediately.

Failure to Repay

If you fail to repay the loan, the IRS treats it as if you took a distribution from the 403(b) plan. In addition to income taxes, if you're not 59 1/2, you'll also owe a 10 percent additional tax penalty. For example, if you had a $6,500 balance remaining on your 403(b) plan loan when you defaulted, you must include the $6,500 as part of your taxable income and pay a $650 additional tax penalty.

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