Not all retirement accounts allow borrowing -- IRAs, for one, are pretty much out. The only types of retirement accounts that you can borrow from are qualified 401(k) plans, 403(b) plans and defined benefit pension plans. And even then, while companies and nonprofit organizations may provide loans from company retirement plans, they don't have to. Some smaller companies and organizations don't want to pay the administrative costs that come with offering loans.
401(k) and 403(b) Loans
Large corporations and small businesses provide 401(k) plans to employees, while public and nonprofit organizations offer 403(b) plans. The rules for 401(k) and 403(b) loans are the same as long as your plan administrator allows you to take out loans. Workers generally are allowed to borrow as much as half of their vested balance in the plan, up to $50,000. The loans typically must be repaid in five years, but most plans allow a longer payback time -- 10 or 15 years -- if the borrower is buying a house.
Some workers who are lucky enough to have a pension can borrow from their pension plan. But a pension loan requires the worker to borrow from a pension funding organization rather than from an account that he owns. The pension funding organization purchases pension payments for the amount the worker borrows and gets its money back when the worker starts receiving pension payments. There are no required loan limits on pension loans, but companies often impose limits on how much workers can borrow from their future retirement income.
When you borrow against a 401(k) or 403(b) plan, the amount you borrow is set aside separately from the investment funds in order to secure the loan. Instead of growth in the markets, you earn an interest rate of return that is equivalent to what your borrowing rate is on the loan. The good news with a 401(k) or 403(b) loan is that you are basically paying yourself interest. The bad news is that the interest is not tax deductible (but neither is the interest on many other types of loans) and you may miss out on earnings until you can pay back the loan.
There is a way to borrow from an IRA on a short-term basis through the 60-day rollover rule, which essentially means you can withdraw money from an IRA with no taxes or penalties as long as you put the money back into the same or a different IRA within 60 days. There are no extensions or exceptions. If you don't put the money you borrowed back into an IRA within 60 days, it is treated as an ordinary withdrawal subject to regular income taxes, plus a 10 percent penalty if you are under 59 1/2 years old.
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