Borrowing from a 403(b) is allowed only if your employer’s plan document specifically includes a loan feature. If it does, federal law caps the loan at the lesser of $50,000 or 50 percent of your vested balance, and you generally have five years to repay it through payroll deductions.1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts The money comes from your own retirement savings, so the stakes of missing a payment or leaving your job with a balance outstanding are higher than with an ordinary bank loan.
Check Whether Your Plan Allows Loans
A 403(b) is a retirement account for employees of public schools, tax-exempt 501(c)(3) nonprofits, and certain ministers.2Office of the Law Revision Counsel. 26 USC 403 – Taxation of Employee Annuities The IRS permits these plans to offer participant loans, but nothing requires them to. If your plan document does not include a loan provision, no amount of savings will unlock one.
The Summary Plan Description, available through your HR or benefits office, will tell you whether loans are offered and on what terms. Most plans also require you to be an active employee on the payroll. Former employees with money still in the plan usually cannot borrow, and beneficiaries who inherited an account are generally excluded.
How Much You Can Borrow
Two federal limits apply. Your loan cannot exceed: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, whichever is less.
The $50,000 ceiling isn’t a clean flat cap. If you had any outstanding loan balance during the 12 months before the new loan, the IRS reduces $50,000 by the difference between your highest balance in that window and your current balance. This blocks the strategy of cycling through multiple loans to keep tapping the full amount.
There’s a small-balance carve-out in the statute: if half your vested balance is under $10,000, you may still borrow up to $10,000. Plans aren’t required to include this exception, so yours may set a stricter floor.3Internal Revenue Service. Retirement Topics – Plan Loans Most plans also cap you at one loan at a time and require the existing balance to be paid off before a new one is approved.
Repayment Rules
Five-Year Term and Quarterly Payments
You have to repay the loan within five years, in roughly equal installments made at least quarterly.1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts You can’t defer everything to the end. In practice, most plans deduct payments from every paycheck.
One exception: if the loan is used to buy your primary residence, the plan may extend the term well beyond five years. The statute doesn’t set a maximum for home loans, so the ceiling comes from your plan’s own rules. Some allow 15 to 30 years.
Interest Rate
The interest you pay goes back into your own 403(b) account rather than to an outside lender. The IRS requires the rate to be comparable to what a bank would charge on a similar secured loan,4Internal Revenue Service. 403(b) Plan Fix-It Guide – Loan Amounts and Repayments Under IRC Section 72(p) which Treasury regulations describe as “commercially reasonable.”5eCFR. 26 CFR 1.72(p)-1 – Loans Treated as Distributions Many administrators use the prime rate plus one or two 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. When you eventually withdraw those same dollars in retirement, they’ll be taxed again as ordinary income. The interest portion effectively gets taxed twice.
How to Request the Loan
Start with your plan administrator or the provider’s online portal. A loan request form will typically ask for your tax ID, the amount you want to borrow, and the term you’d like. Check your most recent statement first so you know your current vested balance.
If your plan is subject to the Employee Retirement Income Security Act (ERISA), which covers private nonprofit employers such as hospitals and private schools, your spouse may need to provide written consent for a loan over $5,000.3Internal Revenue Service. Retirement Topics – Plan Loans The consent has to be witnessed by a notary or a plan representative.6U.S. Department of Labor. FAQs About Retirement Plans and ERISA Most public school 403(b) plans aren’t governed by ERISA and don’t require spousal consent.
Once the paperwork clears a compliance review, usually a few business days, the funds are sent to your bank account or mailed as a check. You’ll receive an amortization schedule, and payroll deductions begin.
What Happens if You Leave Your Job
Separation from your employer, whether you resign, retire, or are laid off, often accelerates the loan. Many plans require you to repay the entire outstanding balance shortly after you leave. If you can’t, the unpaid balance is treated as a distribution and reported on Form 1099-R.3Internal Revenue Service. Retirement Topics – Plan Loans
That distribution is taxed as ordinary income. If you’re under 59½, you may also owe a 10 percent early withdrawal penalty on top of the tax.7Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
There’s an escape route. If the loan was in good standing at separation, the unpaid balance is 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 Doing so avoids both the income tax and the early withdrawal penalty. You’d have to come up with the cash from another source to fund the rollover, since the money is no longer in the 403(b).
What Happens if You Miss Payments While Still Employed
Missing a payment doesn’t trigger a default overnight. Plans may offer a cure period. The longest one allowed by Treasury regulations runs through 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’d have until June 30 to catch up. Your plan can offer a shorter window or none at all.
If you don’t cure the missed payments in time, the administrator reports the unpaid balance as a “deemed distribution.” It’s taxed as ordinary income and may trigger the 10 percent penalty if you’re under 59½.4Internal Revenue Service. 403(b) Plan Fix-It Guide – Loan Amounts and Repayments Under IRC Section 72(p) The money isn’t physically removed from your account, but it does create a tax bill and can complicate future borrowing.
Some plans let you recover from a default by paying all missed installments plus interest in a lump sum, or by re-amortizing the remaining balance over what’s left of the original term.4Internal Revenue Service. 403(b) Plan Fix-It Guide – Loan Amounts and Repayments Under IRC Section 72(p) Availability depends on the plan.
The Real Cost of Borrowing From Yourself
Beyond interest, most providers charge a one-time origination fee and an annual maintenance fee while the loan is outstanding, commonly $25 to $75 per charge. Notary fees may apply if spousal consent is required, though plan representatives can often serve as witnesses at no cost.
The larger cost is the growth you give up. Money out on loan isn’t invested. Repaying yourself with interest offsets part of the loss, but the loan rate is usually lower than long-term market returns. Over five years on a large balance, the gap between what you’re paying yourself and what the market might have returned can add up to thousands in lost retirement savings.
Weigh that against alternatives like a home equity loan or personal line of credit, where your retirement account stays intact. If a 403(b) loan is still the right call, keeping the amount small and repaying it quickly limits the long-term damage.