Yes, borrowing from your 403(b) is allowed under federal law, but only if your employer’s plan document includes a loan feature. When it does, you can take out up to $50,000 or half your vested balance, whichever is less, and repay the money through payroll deductions with interest that flows back into your own account. The mechanics are simple. The tax traps and hidden costs are not.
Check Whether Your Plan Offers Loans
The tax code authorizes 403(b) loans but doesn’t require any plan to offer them.1Office of the Law Revision Counsel. 26 USC 403 – Taxation of Employee Annuities Your employer decides. Many plans skip the feature entirely. Others set a minimum loan amount (often $1,000), cap the number of outstanding loans, or restrict which account sources you can borrow against.
Look at your Summary Plan Description, or ask the benefits office. If loans aren’t in the plan document, you can’t take one no matter the circumstances. A hardship withdrawal would be your only remaining option, and it comes with stricter rules and permanent tax consequences.
How Much You Can Borrow
The IRS caps every 403(b) loan at the lesser of $50,000 or 50% of your vested account balance.2Internal Revenue Service. Retirement Topics – Plan Loans “Vested” means the portion you fully own; employer contributions that haven’t finished vesting don’t count. If your vested balance is $80,000, half is $40,000, and $40,000 is your ceiling. If your vested balance is $150,000, half is $75,000, but the $50,000 cap wins.
There’s a small-balance floor. If 50% of your vested balance is less than $10,000, you may still be able to borrow up to $10,000.3Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Plans are not required to include this exception, so confirm it applies before counting on it.2Internal Revenue Service. Retirement Topics – Plan Loans
If you’ve borrowed from the plan in the past 12 months, the math tightens. The $50,000 cap is reduced by the difference between the highest outstanding loan balance you carried during the prior 12 months and the balance owed on the date the new loan is issued.4Internal Revenue Service. Retirement Plans FAQs Regarding Loans This prevents someone from paying down a big loan and immediately re-borrowing the full amount. If you have multiple loans across plans of the same employer, you have to aggregate the balances.5Internal Revenue Service. Issue Snapshot – Borrowing Limits for Participants With Multiple Plan Loans
Loan Types and How Long You Have to Repay
When you apply, you’ll choose between a general-purpose loan and a principal residence loan. The distinction is about repayment length, not what you can spend the money on. A general-purpose loan has to be repaid within five years. A principal residence loan, used to buy the home you’ll live in (not to refinance or renovate), can extend well beyond that, with plans commonly allowing up to 15 years.4Internal Revenue Service. Retirement Plans FAQs Regarding Loans Get the type right on the application. Selecting the wrong one can lock you into a repayment schedule you didn’t intend.
Most administrators handle requests through an online portal where you set the amount, pick the loan type, and authorize payroll deductions. Processing typically takes a few business days to two weeks, with funds delivered by direct deposit or check.
Interest, Fees, and Payments
Federal law requires level amortization: substantially equal payments of principal and interest, made at least quarterly, over the life of the loan.3Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Most plans satisfy this by pulling payments from every paycheck.
The interest rate has to be “reasonable,” meaning comparable to what a bank would charge on a secured personal loan.6Internal Revenue Service. 403(b) Plan Fix-It Guide – You Haven’t Limited Loan Amounts and Enforced Repayments as Required Under IRC Section 72(p) Most plans use the prime rate plus one percentage point. With the prime rate at 6.75% as of early 2026, a typical 403(b) loan rate is around 7.75%.7Board of Governors of the Federal Reserve System. Selected Interest Rates (Daily) – H.15 The interest you pay goes back into your own account rather than to a lender.
Expect a one-time origination fee, commonly around $50, and an annual maintenance fee around $25 for as long as the loan is outstanding. Amounts vary by provider and should be listed in your loan disclosure. Small in absolute terms, but on a small loan the percentage stings.
What Happens If You Miss a Payment
A single missed payment doesn’t destroy the loan. Plans can include a cure period that runs through the end of the calendar quarter after the one in which you missed the payment.8Internal Revenue Service. Issue Snapshot – Plan Loan Cure Period Miss a payment in February, and you have until June 30 to catch up. Miss one in October, and you have until March 31 of the following year.
If you don’t cure the shortfall in time, the IRS treats the full outstanding balance, principal plus accrued interest, as a “deemed distribution.”9Internal Revenue Service. Deemed Distributions – Participant Loans The plan issues a Form 1099-R, and you owe income tax on the full amount. Under 59½? Add a 10% early withdrawal penalty.10Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
Here’s what catches people. A deemed distribution isn’t the same as a loan offset. You still owe the money. The loan stays on the books, you can’t take another loan until it’s resolved, and you can’t roll the amount into an IRA. The tax hit lands, but the debt doesn’t go away.11Internal Revenue Service. Plan Loan Offsets
What Happens If You Leave the Job
Leaving your employer with an outstanding balance triggers a loan offset. The plan reduces your account balance by the unpaid amount to close out the debt. Unlike a deemed distribution, an offset is an actual distribution and is eligible for rollover. Under the Qualified Plan Loan Offset rules, you have until the due date of that year’s federal tax return, including extensions, to roll the offset amount into an IRA or another eligible retirement plan.11Internal Revenue Service. Plan Loan Offsets The catch is that you’ll need to come up with the cash from somewhere else, because the plan has already wiped the balance.
Miss that deadline and the offset becomes taxable income. Federal rates for 2026 run from 10% to 37% depending on your bracket.12Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Under 59½, the 10% penalty stacks on top.10Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions On a $30,000 outstanding balance, someone in the 22% bracket under 59½ would lose roughly $9,600 to taxes and penalties.
This is the scenario that undoes people. They take a loan expecting a quiet five-year repayment, then get laid off, change jobs, or accept a better offer. The balance accelerates. If a job change is even a possibility in the next few years, price that risk in before you borrow.
The Real Cost of Borrowing From Your 403(b)
The pitch sounds appealing. You pay interest to yourself instead of a bank. What that framing leaves out is double taxation. You repay the loan, interest included, with after-tax dollars from your paycheck. When you eventually withdraw that money in retirement, you pay income tax on it again. The interest portion gets taxed twice. No other loan does this to you.
Then the opportunity cost. While the borrowed money sits in your checking account, it isn’t invested. Borrow $20,000 for four years during a period when the market returns 8% annually, and you’ve given up roughly $7,300 in growth. That’s compounding you don’t get back, over decades you can’t replay. The 7.75% interest you pay yourself doesn’t fully replace it, because it comes from your own pocket rather than representing new investment gains.
A 403(b) loan isn’t automatically the wrong move. If the alternative is a 22% credit card or a hardship withdrawal that permanently drains the account, borrowing from yourself may come out ahead. Just treat it as a last resort, not a convenient line of credit. The money in that account is doing a job, and pulling it out has a price that’s easy to underestimate.