Can You Borrow From a Defined Benefit Pension?

A defined benefit pension plan is funded by your employer and designed to give you a set amount of income when you retire. You can tap the cash sooner by taking out a loan, but you must follow Internal Revenue Service rules. Also, if you don't pay it back, you might be forced to pay income tax on the amount you took out.

Pension loans are only allowed for certain types of defined benefit plans. The IRS allows you to borrow from a qualified plan that falls under section 401(a), 403(a) or 403(b) of the Internal Revenue Code. You can also take out a loan from a state or federal pension plan, including the Thrift Savings Plan. There are no hardship requirements to meet, but you may have to get your spouse's consent to take out the loan. You'll also need to check with your plan administrator to see if you're eligible for a loan.

The IRS limits how much money you can borrow from a defined benefit plan. As of 2018, you have two borrowing options and can only take whichever of these numbers is the least: either $10,000 or 50 percent of your vested account balance, whichever is highest, or $50,000. For example, if your vested balance is $30,000, you can only borrow up to $15,000. The IRS allows you to take out more than one loan at a time, but the total amount you borrow can't be more than the $50,000 limit. It's up to your plan administrator to determine whether you can have multiple loans.

Generally, any loan from a defined benefit pension must be repaid within five years, but the IRS allows some exceptions. For example, you can extend the loan term if you're borrowing against your pension to buy a home. If you're in the military, you can ask that your loan payments be suspended while you're on active duty. You can also suspend payments for up to a year if you're taking a leave of absence from your job. When you come back to work, you'll have to bump up your payment amount so the loan is paid off within the five-year term.

If you don't pay back your pension loan on time, your plan administrator could decide to deem it a distribution. If this happens, you'll have to pay income taxes on the amount you borrowed. If you're under age 59 1/2, you'll also have to pay a 10 percent early withdrawal penalty on the money.

If you default on a pension loan, the IRS doesn't allow you to avoid a tax penalty by rolling the money over into another retirement plan. If you leave your job, you'll have to repay the loan balance in full to keep it from being treated as a distribution.