Can I take out a loan from my retirement account?
Many, but not all, 403(b) and 457 plans allow participants to take loans. Check with your district to see whether loans are an option in your plan. If loans are allowed, the maximum loan amount is usually 50% of your vested account balance or $50,000, whichever is less. Generally, loans must be repaid, with interest, within five years.
A better question may be should you take a loan from your retirement plan. And often, the answer is no:
- Loan origination, servicing or other fees, added to the interest you pay, may make a loan from your retirement plan more expensive than a loan from a financial institution. In some cases, the interest is paid back into your own account. But in others, it is paid to the vendor. Check the specifics in your plan before making a decision.
- If you lose your job, you’ll have to repay the loan immediately or it will be considered a distribution, subject to ordinary income tax and a 10% penalty if you’re younger than 55 (10% penalty does not apply to 457 plans).
- You’ll have to repay the loan with after-tax dollars, even though the money you borrow went into your account pre-tax. Then, when you withdraw the money from your account in retirement, you’ll pay taxes on that same money again.
- You will lose the potential for growth on the money, had it stayed in your account. This could imperil your financial security in retirement.
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