Borrowing Money From Your 401-k or 403-b

Your favorite nurse (you)  return home, after a difficult 12 hour shift.  One patient complained to your shift supervisor that you didn’t respond to the call light quickly enough-(after ringing it every thirty minutes the whole shift).  One of your co-workers stayed on the phone  with her boyfriend.

You walk into the door, planning to take a hot bath and relax (after you feed the kids and clean-up after your husband!).   And it is sooo hot.  You check the thermostat-yea it’s set at 76, so why is it 90 degrees inside??

Of course, the AC guy, when he finally comes by, after you spent a miserable night in your sweltering home-gives you the great  news.  Your condenser is shot-”We can get you a great new model-it will even save you  money on your power bill.  It  has this neat green energy label on it, too-for  JUST $4,000 bucks.”

“You guys got a payment plan?” you ask-knowing your savings balance….and hoping for compassion.

“Uhhh, no, we do AC- we ain’t no bank…..” is the quick reply.

Well, you call your bank, and they aren’t loaning money without collateral right now.  You call your parents, and they are tapped out too, (or too smart to loan you money-they KNOW you!!!!)

You go to work, stressed out about where you are going to get that kind of money. You have heard your friends talk about “The Millionaire Nurse Blog” and getting control of their finances, but you have just been too busy to bother.

Then during the middle of your shift, you overhear two co-workers talking about borrowing money from their retirement account-the same 403-b that you contribute to, (1%, but at least it’s  something).  And you think-”That’s the answer to my prayers-I’ve got $15,000 in that account.”

You do one of these little dances:

So you make the call to the  benefits manager and get the ball rolling on paperwork.

What’s the skinny on 401-k or 403-b loans?

• Some accounts don’t allow loans.  Depends on the plan’s rules, which are different for every employer.
• You can’t borrow more than 50% of the account, and most have a  $50,000 cap.
• Most do not allow you to continue to contribute, until the loan balance is paid.
• Interest is usually floating, based on the prime rate plus  a specified amount.
• Most have to be repaid within 5 years.
• If you quit or get fired, the loan will have to be repaid within 90 days in most cases- or it will be considered a disbursement-and you will also owe the feds taxes and a 10% penalty due immediately, (unless you are over 59 1/2.)

So what does all this mean-?

Is borrowing against a 401-k or 403-b a good thing or not?

• Avoid borrowing unless no other choice -is usually my mantra!  This is your retirement we are talking about-Ramen noodles when you are 70 doesn’t sound too appetizing to me!
• If you have no other choice but bankruptcy, then this may be a good time to borrow.   The stock market and bond returns are crappy.  Maybe you will get lucky and the interest you are paying to yourself will outpace returns you are getting with your investments.  “Blind hogs finding acorns and all that!”
• I would get an extra job, work overtime and sell my stuff to pay this back as quickly as possible.  Don’t depend on the timetable for withdrawal from your check over 5 years to pay off the note.  Get after it!!!! Too much can change in your life over 5 years that could make this bad idea, even worse!
• Remember, your opportunity costs include  whatever growth your account would be earning, and the additional funds you are not investing every pay period.
• And this is why you need a savings cushion-don’t let your life always be one speed bump away from a crisis.  Read this post on developing emergency savings, and this on why you need a little financial margin in your life.

And if you want to read other takes on borrowing against a 401-k or 403-b, check out these articles:

• My prior post on the frustration of watching your 401-k or 403-b balance fall or fail to grow.
• Morningstar has this take-also includes info about borrowing against your home-another dangerous loan!
• This discusses the argument about whether you pay taxes twice on 401-k loan amounts.
• Calstars rules on borrowing can give you a taste of what some organizations rules are about 403-b borrowing.
• Redeeming Riches includes 401-k borrowing as one of the 5 dumb financial mistakes!

Reader Questions:

What are your questions and concerns about borrowing from your retirement fund? Have you done it and what were the consequences?

Do you have other suggestions for folks in need of emergency money, that don’t want to put it on a credit card and have no savings?

Let us hear from you.

Dr Dean