from an Employer
Sponsored Retirement Plan
401(k) and 403 (b) participants have discovered a "hidden"
benefit to their tax deferred retirement account: you can borrow
from it. However, while there are some great advantages to doing
so, exercise prudence and understand the subject carefully - there
are also some potentially serious disadvantages.
have access to potentially large quantities of cash. Most plans
offer loans against contributions of up to half of your vested
balance (with a $50,000 limit).
Interest rates for loan plans can be very competitive. They
are typically the prime rate plus one or two percentage points
- much lower than the rates for the average credit card or unsecured
are no restrictions for how you spend the money. It can be used
to assist in everything from a financial emergency to a down
payment on a home.
a plan loan is convenient and easy - some requiring only a phone
call, others filling out a short loan form.
is no credit requirement for the loan.
typical loan repayment term of five years fits most consumers'
you use the plan loan to buy a primary residence, the loan may
be secured with the home. Under that circumstance, the interest
would be tax-deductible.
most plans, if you leave your job (whether you are laid off,
fired, or if you quit), the remaining balance of the loan will
be due immediately. That may be the time when you can least
afford to pay it back.
you are unable to repay the loan, the IRS will consider it a
"deemed distribution." You will be taxed on the earnings,
and if you are younger than age 59 ½, you will also be
penalized 10% for an early withdrawal.
a plan loan can be too easy - if you have spending issues, they
may remain unresolved and your retirement savings jeopardized.
low interest rate for borrowing against your plan may be misleading.
If you borrow money from your plan at 6.75%interest, but the
money you pulled out of the account had been earning 15%, then
15% is the real cost of your loan.
will lose all future compounding interest on the lost earnings
for the amount you have borrowed.
could be hit with double taxation. The interest you pay yourself
on the loan comes from money that has already been taxed. But
the assets in your plan count as untaxed earnings. That means
you will pay taxes on that money again in retirement when you
make withdrawals from the plan.
may be fees for obtaining the plan loan - a one-time fee, maintenance
fee, or a combination of the two.