How Do You Borrow From a 403(b)?


Quick Answer

To borrow from a 403(b), an account holder must apply for the loan, the plan sponsor must make loans available and the loan must meet certain requirements. Account holders must make quarterly payments and repay the loan within five years or risk penalties.

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Full Answer

Some employers offer employees the option to invest in a 403(b) retirement account. The IRS does not require 403(b) plan sponsors to let account holders borrow money. Those that do must limit account holders to borrowing the lesser of 50 percent of their vested account value or up to $50,000. For example, an account holder with a vested account balance of $30,000 can borrow up to $15,000, which is the lesser of 50 percent of the vested account value and $50,000. However, an account holder with a vested account balance of $200,000 can borrow up to $50,000, which is the lesser of 50 percent the vested account value, or $100,000, and $50,000. The IRS lets account holders with vested account balances of up to $10,000 borrow the full amount, though plans can opt not to include this option.

Account holders must make at least quarterly payments to repay their 403(b) and pay back the borrowed amount in full within 5 years unless the account holder uses the money to buy a primary residence. Loan terms in that situation can exceed 5 years. The IRS also requires that plan sponsors charge account holders interest on the loan. The IRS charges account holders who do not pay back the loan within 5 years a 10-percent early withdrawal penalty on the entire loan amount, not just on the unpaid portion.

Some plans require an account holder's spouse's consent to loans of more than $5,000, and others require account holders pay back the loan within 60 days of leaving the employer that sponsors the 403(b). Some actually suspend repayment during an account holder's active duty in the military or during other leaves of absence if the account holder no longer earns enough to repay the loan.

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