You can usually borrow from a 403(b) account, but only if your employer’s plan document specifically allows participant loans. When loans are permitted, federal law caps the amount at the lesser of $50,000 or 50 percent of your vested balance, and you generally have five years to repay through payroll deductions.1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Because the money comes from your own retirement savings, the real question is not whether you can borrow but what it costs you if something goes wrong.
Does Your Plan Actually Allow Loans
403(b) plans cover employees of public schools, tax-exempt nonprofits organized under Section 501(c)(3), and certain ministers.2Office of the Law Revision Counsel. 26 USC 403 – Taxation of Employee Annuities The IRS permits these plans to offer loans, but it does not require it. If your plan document is silent on loans, you cannot borrow against your balance no matter how much you have saved.
Check your Summary Plan Description through human resources or your plan provider’s online portal. Most plans also restrict loans to active employees currently on the payroll. Former employees who left money in the plan often cannot borrow, and beneficiaries who inherited a 403(b) are generally excluded.
How Much You Can Borrow
Federal law sets two ceilings. Your loan cannot exceed whichever is lower:1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
- $50,000, or
- 50 percent of your vested account balance.
If you had any outstanding loan balance during the 12 months before the new loan, the $50,000 cap is further reduced to prevent cycling through multiple loans to repeatedly tap the full amount.1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Most plans also limit you to one outstanding loan at a time and require you to pay off a current loan before approving a new one.
How You Repay
Five-Year Term
Federal law requires repayment within five years, with substantially equal installments made at least once per quarter.1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts You cannot defer payments to the end of the term. Most plans deduct from every paycheck rather than billing quarterly.
One exception stretches the clock: if you use the loan to buy your primary residence, your plan may allow a repayment period much longer than five years. The statute does not set a specific maximum for home loans, so the ceiling comes from plan rules. Some plans permit terms as long as 15 to 30 years.
Interest Rate
The interest you pay goes back into your own account, not to an outside lender. The IRS requires the rate to be comparable to what a bank would charge on a secured personal loan.3Internal Revenue Service. 403(b) Plan Fix-It Guide – Loan Amounts and Repayments Under IRC Section 72(p) Treasury regulations describe this as a “commercially reasonable” rate.4eCFR. 26 CFR 1.72(p)-1 – Loans Treated as Distributions Many administrators use the prime rate plus one or two percentage points, fixed for the life of the loan.
You Repay With After-Tax Dollars
Your original 403(b) contributions were pre-tax. Loan repayments come out of your take-home pay, which has already been taxed. Later, when you withdraw those same dollars in retirement, they are taxed again as ordinary income. The interest portion of your repayments is effectively taxed twice.
How to Request the Loan
Contact your plan administrator or log into the provider’s online portal. You will complete a loan request form asking for your tax identification number, the dollar amount, and your preferred repayment term. Confirm your current vested balance on your most recent statement before you submit.
If your 403(b) is subject to the Employee Retirement Income Security Act (ERISA), which covers many private nonprofits such as hospitals and private schools, your spouse may need to provide written consent before a loan over $5,000 is approved.5Internal Revenue Service. Retirement Topics – Plan Loans That consent must be witnessed by a notary public or a plan representative.6U.S. Department of Labor. FAQs About Retirement Plans and ERISA Non-ERISA plans, including most public school 403(b)s, generally do not require spousal consent.
After a brief compliance review, funds are sent to your bank account or mailed as a check. Your administrator provides an amortization schedule, and payroll deductions begin.
What Happens If You Leave the Job
This is the single biggest risk. Leaving your employer, whether by resignation, retirement, or layoff, can immediately accelerate the loan. Many plans require full repayment shortly after separation. If you cannot pay, the unpaid balance is treated as a distribution and reported on Form 1099-R.5Internal Revenue Service. Retirement Topics – Plan Loans
You then owe income tax on the unpaid amount. If you are under 59½, add a 10 percent early withdrawal penalty.7Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts For someone in the 22 percent federal tax bracket with a $30,000 unpaid balance, that works out to roughly $9,600 in combined taxes and penalties.
There is one way out. If the loan was in good standing when you left, the unpaid balance counts as a “qualified plan loan offset.” You can roll that amount into an IRA or another eligible retirement plan by your tax return due date, including extensions, for the year the offset occurs.8Internal Revenue Service. Plan Loan Offsets That rollover avoids both the income tax and the early withdrawal penalty. You will need to come up with the cash from another source, since the money is no longer in your 403(b).
What Happens If You Miss Payments
If you fall behind while still employed, your plan may offer a cure period. Treasury regulations set the maximum cure window at the last day of the calendar quarter after the quarter in which you missed the payment.9Internal Revenue Service. Issue Snapshot – Plan Loan Cure Period Miss a February payment, and you have until June 30 to catch up. Your plan may offer a shorter window or none at all.
Miss the cure window and the administrator reports the unpaid balance as a “deemed distribution.” It is taxed as ordinary income and may trigger the 10 percent early withdrawal penalty if you are under 59½.3Internal Revenue Service. 403(b) Plan Fix-It Guide – Loan Amounts and Repayments Under IRC Section 72(p) The money stays invested in your account, but the tax bill lands anyway and future borrowing may be harder.
Some plans let you recover from a default by paying all missed installments and interest in a lump sum, or by re-amortizing the remaining balance over what is left of the original term.3Internal Revenue Service. 403(b) Plan Fix-It Guide – Loan Amounts and Repayments Under IRC Section 72(p) Availability depends on your plan.
What It Really Costs
Beyond interest, many providers charge a one-time origination fee and an annual maintenance fee while the loan is outstanding, commonly in the $25 to $75 range. If your plan requires notarized spousal consent, a small notary fee may apply, though plan representatives can often witness at no charge.
The larger cost is harder to see. While your money is out of the account, it is not invested. Repaying yourself with interest only partly offsets this, because the loan rate is typically lower than long-term market returns. Over a five-year loan on a sizable balance, the gap between what you pay yourself and what the market might have produced can run into thousands of dollars in permanently lost retirement savings.
Before borrowing, compare the full picture against a home equity loan or a personal line of credit, where you are not pulling from retirement savings. If a 403(b) loan still makes sense, keeping the amount small and paying it back quickly limits the damage.