Borrowing From Your 403(b) Plan

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on February 15, 2024

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Borrowing From a 403(b) Overview

Borrowing from a 403(b) plan means taking a loan against the funds you have contributed to your 403(b) retirement savings account. T

This option is typically available to employees of public schools and certain tax-exempt organizations who participate in these plans.

The loan must be repaid with interest over a specified period, typically five years, though a longer period may be allowed for home purchases.

The maximum loan amount is generally the lesser of 50% of your vested account balance or $50,000. Borrowing from your 403(b) is a way to access your funds without incurring taxes or penalties, provided the loan is repaid according to the agreed terms.

However, it's essential to consider the potential impact on your long-term retirement savings before deciding to borrow.

Process of Borrowing From 403(b) Plan

Obtaining a loan from your 403(b) plan involves understanding your loan limit, filing an application, and setting up a repayment plan.

Determine Loan Limit

Typically, the IRS permits loans of up to 50% of your vested account balance, or $50,000, whichever is less. However, if your balance is less than $10,000, you may be able to borrow up to that amount.

File an Application

Once you've determined how much you can borrow, the next step involves contacting your plan administrator and filling out a loan application. Depending on your plan's rules, the process may be done online or require paper forms.

Loan Disbursement and Repayment Setup

After approval, the funds are disbursed, often in a lump sum. You'll then have to set up a repayment plan. Payments are typically taken directly from your paycheck on an after-tax basis.

Process of Borrowing From 403(b) Plan

Rules and Regulations of Borrowing From 403(b) Plan

IRS Guidelines and Limits on 403(b) Loans

The IRS sets clear guidelines and limits on 403(b) loans, including maximum loan amount, repayment timeline, and tax consequences for default.

Maximum Loan Amount

As mentioned, the maximum loan amount is typically the lesser of 50% of your vested account balance or $50,000. However, exceptions may apply if your balance is less than $10,000.

Repayment Timeline

The IRS generally requires that you repay the loan within five years, though a longer repayment period may be allowed for a loan used to purchase a primary residence.

Tax Consequences for Default

If you fail to repay the loan as agreed, the IRS treats the unpaid balance as a taxable distribution. If you're under 59½, an additional 10% early withdrawal penalty may also apply.

Employer-Specific Rules and Limitations

In addition to the IRS rules, your employer may have specific 403(b) loan policies that can impact your ability to borrow.

Each employer can set its own rules for 403(b) loans, including whether to allow loans, how many loans you can have at once, and the minimum loan amount. Make sure to understand these rules before borrowing.

Your employer's rules can significantly affect your ability to borrow from your 403(b). For instance, some employers may not allow loans at all, while others might have stricter repayment terms.

Rules and Regulations of Borrowing From 403(b) Plan

Alternatives to Borrowing From 403(b) Plan

Taking a Withdrawal From the 403(b) Plan

Before considering a loan from your 403(b) plan, you might think about other options, like taking a withdrawal.

Understand the Penalty for Early Withdrawal

Withdrawals before age 59½ are subject to income taxes and a 10% early withdrawal penalty, significantly reducing the amount available to you.

Potential Exceptions for Hardship Withdrawals

The IRS allows penalty-free withdrawals for certain immediate and heavy financial needs, often referred to as hardship withdrawals. These can include medical expenses, education tuition, or costs related to purchasing a primary residence.

Exploring Other Loan Sources

Other sources of funds might be more suitable for your situation. Some options include personal loans, home equity loans, and credit card advances.

Personal Loans

Personal loans can be a good alternative, especially for those with good credit. They typically have lower interest rates than credit cards and don't require collateral.

Home Equity Loans

If you're a homeowner, a home equity loan or line of credit may provide lower interest rates. However, your home is used as collateral, which can be risky if you have trouble repaying the loan.

Credit Card Advances

While credit card advances can be quick, they often come with high-interest rates and fees. Therefore, they are usually considered a last resort.

Alternatives to Borrowing From 403(b) Plan

Pros and Cons of Borrowing From 403(b) Plan


Borrowing from a 403(b) plan can provide financial relief when needed, with interest paid back into your own account and without needing a credit check.

Access to Funds When Needed

In case of an emergency or major expense, a 403(b) loan can provide funds quickly, typically within a week of applying.

Interest Paid Back Into the Account

The interest you pay on the loan goes back into your own 403(b) account, not to a bank or other lender.

No Credit Check Needed

Unlike many other types of loans, borrowing from your 403(b) doesn't require a credit check. This can make it a good option for those with poor credit.


Despite its benefits, borrowing from your 403(b) plan can lead to reduced retirement savings, has tax implications, and poses risks if your employment is terminated.

Potential for Reduced Retirement Savings

Taking a loan can reduce your retirement savings, particularly if you decrease or stop contributions during the repayment period.

Tax Implications

Although not taxed at disbursement, the loan repayments are made with after-tax dollars. Also, if you default on the loan, it will be treated as a distribution and become subject to income tax and possibly early withdrawal penalties.

Risks if Employment Is Terminated

If your employment is terminated while you have a loan outstanding, you may need to repay the full balance quickly, often within 60 days, or face taxes and penalties.

Pros and Cons of Borrowing From 403(b) Plan

Strategies for Repaying a 403(b) Loan

Once you've taken a 403(b) loan, developing a strategy for repayment is essential. You'll need to consider the impact on your retirement savings and manage repayment efficiently.

Repaying your 403(b) loan quickly can help minimize the impact on your retirement savings. However, the more money you dedicate to repaying the loan, the less you might be able to contribute to your plan, potentially slowing the growth of your retirement savings.

One strategy is to maintain your regular 403(b) contributions while repaying the loan. This can be challenging but will help ensure your retirement savings continue to grow. Another is to tighten your budget or seek additional income to cover loan payments.


While borrowing from your 403(b) plan can provide immediate financial relief, it's a decision that requires careful consideration.

The advantages, such as rapid access to funds and interest paid back to your own account, need to be weighed against the potential risks.

These risks include a reduction in your retirement savings, the impact of tax implications, and possible penalties upon termination of employment.

Adherence to both IRS and employer-specific regulations is critical when opting for a loan from your 403(b). Alternatives, like personal loans or hardship withdrawals, may provide viable solutions.

If you do proceed with a 403(b) loan, crafting a robust repayment strategy that maintains your retirement contributions is crucial. Ensuring a full understanding of the potential implications on your future financial security is key when considering a 403(b) loan.

Borrowing From Your 403(b) Plan FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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