403(b) Loans: Can You Borrow From Your Account?

When an unexpected expense comes up, you might consider borrowing from your retirement account. Most qualified retirement plans, including 401(k) and 403(b) accounts, allow employees to borrow from their savings. These loans must be repaid with interest. Borrowing from a retirement account is a big decision, though, potentially impacting your long-term financial outlook. Consider both the advantages and disadvantages detailed below before committing.

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What Is a 403(b) Account?

A 403(b) savings plan is a retirement account offered by public schools, churches and tax-exempt organizations. Similar to the 401(k) savings plan available to private-sector employees, the 403(b) plan allows participants to save money for retirement through payroll deductions and benefit from employer-contribution matches.

Your 403(b) plan has the same caps on yearly contributions as 401(k) plans. If your employer offers both a 403(b) and 401(k) savings plan, you can contribute to both, but your combined contributions for the year cannot exceed the annual limit.

When Can You Borrow From a 403(b) Account?

403(b) loans differ from normal bank loans, which might be why you’re considering borrowing from your retirement account. There is no credit check or requirement, and 403(b) loan interest rates can often be substantially lower than those offered by a bank for a private loan. Integrity Wealth Advisors reports that 403(b) loan interest typically equals the prime rate plus 1%. If the loan follows IRS rules and you repay it on time, it won’t count as taxable income.

Not all 403(b) plans include a provision that allows you to borrow from your retirement account. You must first verify with your plan administrator that this is even an option. You can also only borrow from a 403(b) plan offered by your current employer. Loan provisions typically aren’t available from plans associated with former employers.

To qualify for a 403(b) loan, the following conditions typically apply:

Loan limit: You can borrow up to 50% of your vested account balance, with a maximum of $50,000, whichever is less.
Repayment timeline: Loans must generally be repaid within five years, with payments made at least quarterly. If the loan is used to purchase a primary residence, repayment terms may extend up to 15 years.
Separation from employer: If you leave your job, your plan may require you to repay the entire outstanding loan balance immediately. If you don’t repay the loan, the plan may treat the unpaid balance as a distribution, triggering income taxes and a possible 10% penalty.
Purpose of loan: While the IRS does not require a specific reason to take a 403(b) loan, your employer may impose restrictions on loan eligibility or usage. Always check with your plan administrator for your plan’s specific rules.

What Should You Consider Before Taking a 403(b) Loan?

Borrowing from a 403(b) plan can be a convenient way to access cash without going through a credit check or paying high interest rates. However, taking a loan from your retirement account also comes with trade-offs, including the risk of penalties and lost investment growth if the loan isn’t repaid properly or quickly.

Advantages of 403(b) Loans

Ease of borrowing: No credit check is required, and loan approvals are usually fast.
Low interest rates: The interest rate is often only 1% higher than the base bank rate, which is notably lower than most personal loan rates and credit card interest rates.
Repayment goes back to your account: Interest payments are returned to your own retirement balance.
No early withdrawal penalty: As long as the loan is repaid on time, there’s no 10% early withdrawal penalty.

Disadvantages of 403(b) Loans

Loan default risks: Missed payments can trigger income tax and a 10% early withdrawal penalty.
Repayments are made with after-tax dollars: You’ll pay income tax again when withdrawing funds in retirement.
Reduced retirement growth: Borrowed funds are no longer invested, limiting potential gains.
Job change complications: If you leave your job, the outstanding loan balance may become due immediately.
Opportunity cost: By borrowing money from your retirement account, you will lose out on the investment returns you could earn over that same time period.

Alternatives to 403(b) Loans

You may want to explore other funding options that won’t impact your retirement savings.” One alternative is a personal loan from a bank or credit union, which may offer reasonable rates, especially if you have strong credit. Home equity loans or lines of credit (HELOCs) can also provide access to funds at relatively low interest, though they carry the risk of putting your home on the line.

A Substantially Equal Periodic Payment (SEPP) plan is another alternative. SEPP plans let you withdraw retirement funds before age 59 ½ without paying the early withdrawal penalty. They are not eligible to be taken from 403(b) plans at your current employer, only from past accounts or IRAs. This option comes with strict rules and long-term commitment. However, if you need early access to retirement funds, you could roll your 403(b) into an IRA and use a SEPP plan.

It could be useful to compare your 403(b) loan interest rate against the potential returns of keeping the money in the account. If your average annual investment returns are much higher than your interest rate, you could be losing out on significant earnings.

Bottom Line

Taking a loan from your 403(b) plan can offer short-term financial relief with relatively low borrowing costs, but it comes with long-term consequences that may affect your retirement savings. While the ease and speed of borrowing are appealing, repaying the loan with after-tax dollars and potentially facing penalties if you leave your job or default should not be overlooked.

Before proceeding, weigh the benefits against the risks, and consider whether other funding sources may better protect your future financial stability. If you’re unsure, consulting a financial advisor may help clarify the most suitable path forward.

Retirement Planning Tips

Not sure whether borrowing from your retirement savings will hurt your retirement plans? For financial advice, consider speaking with a financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Use SmartAsset’s free retirement calculator to get an estimate of how much money you’ll need to retire and how much income you can expect to have.