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Borrowing from a 403B

by Redeeming Riches on June 4, 2012

403B is a type of retirement savings account that is offered by some companies and sometimes borrowing from a 403B plan makes sense. Public school employees and people who work at non-profit organizations may have these plans. Although they should not be distributed before retirement, they can be borrowed against. 403B loans are not included in the borrower’s taxable income. They should not be reported as early distribution. Otherwise, the borrower will have to pay a 10 percent tax penalty.

403B loans are very beneficial for those who are in urgent need of money. However, they can be a great disadvantage for people who tend to use loans in other ways. This is because they need to pay the interest on these loans. The loan will also hinder the growth of their retirement plan.

borrow from 403B

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Applying for 403B Loans

• Borrowers should confirm with their 403B plan administrators to see if they are eligible for loans. There are some 403B plans that do not allow loans. The IRS allows 403B plans to offer loans for plan holders, but this is not a requirement.

• Plan holders will know the maximum amount they can borrow from their 403B by simply multiplying the value by 0.5. People can only borrow up to $50,000 from their 403B.

• Plan holders can choose whether they want to have their loan proceeds directly deposited into their accounts or disbursed by check. They should apply for the loan through their lenders. They may need to fill out information on application forms or just request it over the phone.

• 403B loans are best paid in term shorter than five years. This can be possible by opting for quarterly payments. The IRS will treat it as 403B plan distribution if borrowers do not pay the loan on time. This means that they will have to pay taxes and penalties.

• Plan holders who apply for a loan for the purpose of purchasing a residence may be eligible for longer term loans.

• 403B loans have reasonable interest rates. Plan holders should know the interest rates before they consider applying for loans.

Plan holders may also borrow money from their 403B accounts in the form of hardship distributions. However, this can only be approved if the plan holder can prove that they have a severe financial burden. Plan holders should make sure they meet the criteria for hardship distribution. Otherwise, they will put their tax sheltered annuity at stake.

• Borrowers may use 403B distributions to pay for personal or dependent medical bills that are not reimbursed.
• They may also use it as a down payment for the purchase of their primary residence.
• Hardship distributions can be taken for tuition fees for post-secondary education.
• These distributions may also be applicable for payment to save primary residences from foreclosure.

Plan holders should also make sure that the 403B loan is their last resort. This is because they are borrowing from their future. With this, their financial security is at risk. It is best that they try personal loans and other financing options first. The disadvantage that comes from borrowing from a 403B is that plan holders will be prohibited from participating in their plan until the debt is fully paid. In addition, plan holders will miss benefits if their plan is matched with employee contributions.

Plan holders will pay a considerable amount of money for penalties and charges if they give up paying their loans. Plan holders may also face problems when they decide to resign from their jobs. The lender will ask the 403B loan borrower to pay the debt in full. This is because they no longer have any assurance when the borrower quits his or her job.

It is a good idea to take advantage of the 403B loan if there are no other options left. However, it is of paramount importance that plan holders decide carefully. 403B plans are savings for the future. It is wise to seek help from financing professionals before taking these loans out. They can help plan holders explore other options. There are many lenders that are eager to offer personal loans. However, 403B loans can save people who have no other choice.

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