403(b) LOAN INFORMATION

The contributions employees invest in the KCTCS 403(b) plan are designed to help when they need them the most: at retirement. But because unexpected circumstances can arise, the KCTCS 403(b) plan allows employees to use their retirement account to obtain a loan, if allowed by their carrier. Although the loan provision offers employees the flexibility to take out a loan from their 403(b) carrier, it does not mean a loan of this type is always the best way to secure the cash one might need.

While it may be easy to forget about saving for retirement during difficult times, employees should compare the potential benefits of taking out a loan versus the potential costs to their overall retirement savings, now, and over time. Employees should keep in mind that the purpose of contributing to a retirement plan is to provide adequate savings for retirement.
Here are some Advantages and Disadvantages of borrowing on your retirement plan:

ADVANTAGES

· Cash may be readily available. Generally, you may borrow up to the lesser of $50,000.00 or 50% of your account balance. Loans must be repaid within 5 years, in substantially equal payments, on at least on a quarterly basis. Loans for the purchase of a primary residence may be repaid over 10 years. Your carrier may impose other limits.
· No distribution or tax penalties.
· Low Interest Rates

DISADVANTAGES

· Tax Penalties- If you default on your loan or otherwise fail to pay it back (even missing one payment) your loan may be considered an early distribution, which would be subject to ordinary income taxes and a 10% penalty when you file your annual tax return, if you’re younger than age 59 ½.

· May lose out on potential investment returns- When an employee uses their retirement account as collateral for a 403(b) loan, the amount borrowed is typically placed in a separate interest bearing account and does not participate in the market until it is repaid. If the stock market is rising and your money is in a separate account, the outstanding loan balance will not participate in the market gain, and you’ll miss the benefits of compounding of those earnings in the future.

· Loan payments (plus interest) are made with after tax dollars- You will be borrowing money you contributed on a pre-tax basis, and repaying it with after tax dollars. You should note that while it may seem like a loan is tax-free, it isn't. Over time, you will pay taxes on the money twice. First, loan repayments will be paid after income taxes have been withheld, then as repayments are reinvested in your account they are characterized as pre-tax money. So, when you withdraw from your account, you will pay taxes on the money again.

Loan/Carrier Contacts:

Legal Information

THE INFORMATION AND CONTENT PROVIDED ON THIS WEBSITE IS GENERAL IN NATURE AND FOR INFORMATIONAL PURPOSES ONLY. THE INFORMATION AND PRODUCTS MADE AVAILABLE TO YOU ARE NOT INTENDED TO BE AND SHOULD NOT BE CONSTRUED AS: i.) A RECOMMENDATION; ii.) LEGAL OR TAX ADVICE, or iii.) A LEGAL OPINION. KCTCS DOES NOT PROVIDE LEGAL OR TAX ADVICE. YOU SHOULD CONTACT YOUR LEGAL OR TAX ADVISOR REGARDING YOUR SPECIFIC TAX SITUATION PRIOR TO TAKING ANY ACTION BASED UPON THIS INFORMATION.