Most companies allow their employees who use retirement plans like 401ks and 403bs to borrow from these accounts to pay for things that occur before the employee retires. These are not considered withdrawals, and the employee pays the loan back, with interest, over a short period of time. Employees like the idea of “borrowing from myself and paying myself back” and the ease of setting these loans up. However, a 401k/403b loan is a risky college finance strategy that does not always work. In part one of this blog, we’ll look at a few of the reasons why.
How do 401k/403b loans work?
Employees who want to set up a 401k/403b loan contact their 401k/403b manager. The manager sets the repayment terms, which include a five year repayment period (ten years if the loan is to purchase a primary home) and the interest rate. Employees pay the loan back through payroll deduction over 60 months.