403(b) Tax Free Loan
Under certain conditions, it is possible to take a Tax free loan from your 403b plan.
- Your 403b plan, or the tax-sheltered annuity, must provide for loans. That means your plan must be set up to allow for loans.
- The maximum limit on all loans, at any time, cannot exceed $50,000. This means all loans from this employer cannot exceed $50,000.
- Payments on the loan must be made monthly or quarterly (at a minimum). The loan agreement may provide for a three-month grace period, and may also allow a participant to suspend payments during military service.
- The term of the 403b Tax-Free loan may not exceed 5 years, unless the money is used for the purchase of a principal residence.
- Finally, the loan must bear a reasonable rate of interest.
If you fail to pay an amount due on a loan, or default on the loan, then the IRS will treat the entire distribution (not just the remaining balance) as a distribution. In that situation, the 10% early withdrawal penalty will apply.
If your 403b annuity plan offers this benefit, it is possible to obtain a loan from your 403b account before age 59 1/2 However, if the provisions of the 403b loan are not adhered to, then the loan may be deemed a distribution. Additional tax penalties may apply if you're not age 59 1/2. The following list summarizes the 403b loan rules that you need to follow to stay clear of the early distribution penalties:
Tax Free loan from your 403(b) is the best loan you can get if you will pay back the loan on time! But if you will be late on your payments or you will default on your loan payments. The loan will become the worst loan!
Under certain conditions, it is possible to take a tax free loan from your 403b plan. But you have to work closely with your plan administrator to make sure that the loan isn't viewed as an early distribution. If a loan is viewed as a distribution, then it'll be reported as income, and if you're under age 59 1/2, then you may be subject to a 10% tax penalty.
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