If you have a big expense coming up but are a little strapped for cash, you may be considering taking out a loan from your 403 (b) account. A lot 403b) regimes include a loan provision, which allows retirement savers to temporarily access their funds. But there are a few important details you need to know to determine if a 403 (b) loan is your best option.

What is a 403 (b) loan?

A 403 (b) loan is very different from a loan you might get from a bank. There is no credit check and the loan terms can be quite advantageous compared to a personal line of credit, a cash advance on your credit cards, or even a line of credit. guaranteed as a HELOC.

Essentially, you are simply withdrawing funds from your 403 (b) with the intention of returning them over time. As long as you repay the money on time, you won’t pay the taxes and fees associated with early withdrawals.

Each plan has different terms for its loan option, so it’s important to review the details with your plan administrator. But the 403 (b) loan mechanisms all work the same and require the same considerations.

How does a 403 (b) loan work?

When you decide to take out a loan from your 403 (b), you will need to speak to your plan administrator and sign a loan agreement. The loan agreement should detail the terms of the loan – how much interest you will pay and how long you will need to repay the loan.

The IRS limits the amount you can loan yourself. The IRS limits the amount to 50% of your acquired account balance or $ 50,000, whichever is less. If you have less than $ 10,000 in your account, the IRS allows you to take the total balance as a loan. Some plans may have more stringent limits.

The IRS also states that the loan must be repaid in equal installments occurring at least quarterly, and that it must be repaid in full within five years. Again, individual plans may have more stringent rules.

Once you have made your withdrawal, you can use the money for anything you need. In the meantime, you must be signed up to make regular loan repayments from your paycheck equal to the minimum payment required to meet the terms of the loan agreement.

Unlike regular contributions to your 403 (b), loan repayments do not count towards your contribution limits. In addition, the interest portion of the loan payment is paid in after-tax dollars, while regular contributions are generally in pre-tax dollars.

If you have the cash to prepay the loan, you can talk to the plan administrator about creating a repayment statement to pay off the remaining balance.

What to consider before taking out a 403 (b) loan

There are quite a few considerations when taking out a loan from your retirement plan.

While there is no real net interest charge, since you pay the interest yourself, there is still a real cost to borrowing on your savings: the returns you would get by keeping the funds invested.

The S&P 500 averages over 9% returns per year over five-year periods, but there is a wide range of possibilities. It’s impossible to know what the market will do during the life of the loan, but it is more likely to go up than down, creating a cost for your loan. If you can get a Personal loan with a relatively low interest rate, it’s probably a better option than taking out a loan from your 401 (k).

In addition, there are tax implications to consider. Interest you pay into your 403 (b) account is treated as after-tax money. This means that you are paying taxes on it now, and you will have to pay taxes again on it upon withdrawal if you are using a traditional 403 (b) pre-tax account.

If your 403 (b) plan offers designated Roth account and you can withdraw your loan exclusively from that Roth account, you will avoid double taxation on your interest payment. You will pay tax on the payment, but no tax on the withdrawal.

The biggest risk is that of non-reimbursement. If you lose your job, you will be asked to repay the entire loan balance in one go. If you cannot find the money, the balance will be treated as a distribution subject to early withdrawal penalties and taxes. So this “loan” could end up costing you a lot more than a more traditional loan.

Make sure you take all of the above factors into account when considering the 403 (b) loan option. As with most financial options, there are pros and cons, and the deciding factors often boil down to individual circumstances.