How Much Can I Borrow From My 403(b) Plan?

A 403(b) plan offers a retirement savings opportunity primarily for employees of public schools, certain tax-exempt organizations, and ministers. These plans allow individuals to save for retirement, often with tax advantages on contributions and earnings. Some 403(b) plans allow participants to borrow against their savings. This option provides access to funds for immediate financial needs without triggering a permanent withdrawal, which could lead to taxes and penalties. The borrowed money is repaid to your own account.

Understanding Loan Eligibility and Limits

The amount a participant can borrow from a 403(b) plan is subject to specific limitations set by the Internal Revenue Code. The maximum loan amount is the lesser of $50,000 or 50% of the participant’s vested account balance. This limit ensures a substantial portion of retirement savings remains untouched. For instance, if your vested account balance is $80,000, 50% is $40,000, making $40,000 your maximum. If your vested account balance is $120,000, 50% is $60,000, but the $50,000 cap applies, limiting your loan to $50,000.

A “vested account balance” refers to the portion of your retirement savings that you fully own and are entitled to keep, even if you leave your employer. Your personal contributions to a 403(b) plan are always 100% vested immediately. However, employer contributions, such as matching contributions, may be subject to a vesting schedule, meaning they become fully yours only after a certain period of employment or according to a specific schedule. Only the vested portion of your account balance is considered when calculating the maximum loan amount.

Any existing 403(b) loans from the same employer’s plan will reduce the amount available for a new loan. The $50,000 limit is reduced by the highest outstanding loan balance during the one-year period ending the day before the new loan is made, minus the outstanding balance on the date the new loan is made. This calculation prevents participants from continually re-borrowing up to the maximum limit. Individual 403(b) plans can impose stricter rules, such as a lower maximum loan amount, a higher minimum account balance, or specific employment status conditions. Consult your specific plan’s documents for precise eligibility criteria and loan limits.

Key Considerations Before Borrowing

Most 403(b) loans must be repaid within five years. An exception exists for loans used to purchase a primary residence, which allows for a longer repayment term, up to 30 years. Interest rates on 403(b) loans are typically tied to the prime rate plus a percentage, and repayments are generally made through regular payroll deductions.

Failing to repay a 403(b) loan according to its terms has significant financial consequences. If a loan is not repaid as scheduled, the outstanding balance is treated as a taxable distribution from the plan. This means the amount becomes immediately subject to income tax. If the participant is under age 59 1/2 at the time of default, the deemed distribution also incurs an additional 10% early withdrawal penalty.

Borrowing from your 403(b) plan affects your retirement savings: lost investment growth. The funds you borrow are removed from your investment portfolio for the loan’s duration. This means the money is not participating in market gains, which reduces your overall retirement savings accumulation. Even though you repay the loan with interest, the interest goes back into your account, but it may not fully compensate for the investment returns you could have earned had the money remained invested.

The 403(b) Loan Application Process

You provide details such as your desired loan amount, proposed repayment period, and potentially the reason for the loan if your plan requires it. Provide bank account details for direct deposit of loan funds and ensure your contact information is up-to-date. Obtain the official loan application form by contacting your plan administrator, accessing the plan’s online portal, or inquiring with your employer’s human resources department.

Once you have the application form, fill in all required fields accurately to prevent processing delays. After completing the application, submit the form online through a secure portal, mail a physical copy to the plan administrator, fax, or hand-deliver it.

After your application is submitted, processing time varies, from a few business days to a couple of weeks. Confirmation of approval or denial will be communicated to you, often via email or postal mail. If approved, the loan funds will be disbursed according to the method you selected, usually through direct deposit to your bank account, within a specified timeframe after approval. You will receive follow-up communications from the plan administrator regarding the loan terms, repayment schedule, and ongoing management of your loan.