While not recommended by most financial experts, you can borrow money from your 401(k) plan before retirement should you find yourself in a temporary crunch for short-term cash. Some but not all 403(b) plans also offer the option to take a loan against your assets. Essentially, you’re borrowing from your own retirement assets and paying that amount with interest to your own retirement account.
Technically, 401(k) loans are not true loans, because there’s no lender approval process involved. Essentially, you’re simply accessing a portion of your own retirement plan money via a tax-free loan. You then must repay the money under specific rules designed to restore your 401(k) plan to its approximate original state, as if the transaction never occurred. This isn’t money you want to access for the purchase of a new flat-screen TV, but it’s nice to know that the option is there if you find yourself in serious need of a short-term liquidity loan.
For both types of plans, 401k and 403b, you can borrow either 50% of your vested balance or $50,000, whichever is less. If you have less than $10,000 invested, you can borrow up to your account balance.
If you choose to take out a loan against your 401(k) or 403(b), be sure you understand the terms prescribed by your employer’s specific plan. Additionally, there are specific IRS rules that apply, and you need to be careful to follow them exactly. For example, repayment must occur within five years of the date you borrowed the money, and payments must be made quarterly in equal amounts that cover principal and interest.