Thinking of taking a loan from your 403(b)?

Taking a loan from your UC 403(b) Plan account to deal with an unexpected financial need seems like a simple solution, doesn’t it? But the decision to tap your account isn’t so simple when you consider some of the consequences. Employees often reduce or stop saving in their retirement savings plan after taking out a loan, which can significantly hinder their savings abilities. However, life is unpredictable. Sometimes we have to choose: Take a 403(b) loan or another kind of loan.

If you’re considering a 403(b) loan, here’s what you need to know.


You can take either a home loan or a general purpose loan. General loans must be repaid within five years, while home loans can be repaid within 15 years. You may have one general loan and one home loan at a time, but you can only request one loan—of each type—within a 12-month period.


If you’ve exhausted all other options and decide to take a 403(b) loan, make sure you understand the implications.

1. Your loan payments come out of your paycheck.

You’ll tie yourself up for automatic payments over the life of your loans. When you have an extra payment coming out of your paycheck, you might not be able to save as much in your 403(b) Plan (or 457(b) Plan) as you usually do—and that can have a significant effect on how much money you end up having in retirement.

2. You lose out on potential investment growth.

When you borrow money, you pay yourself interest. If you took a loan as of May 9, 2023, you would pay yourself 8.25% interest.1

Now, as a consumer, a low interest rate is good. But as an investor, you’re giving up potentially much higher returns you could have received if you had kept the money invested.

How much higher? While past performance doesn’t guarantee future returns, it’s interesting to note that, between 1973 and 2022, the average annual return was 10.2% for domestic stocks and 6.6% for bonds.2

3. You must pay back the outstanding balance in full or pay taxes on the amount you don’t repay.

If you leave UC and do not repay your loan, the amount you do not repay is considered a distribution. That means you will have to pay federal income tax (and California State income tax in most cases) on that amount. If you’re younger than age 59.5, a 10% early withdrawal penalty (2.5% State) may also apply.


It’s important to consider the effects a plan loan might have on your retirement savings. If you don’t manage it properly, it could affect your retirement picture.

Potential consequences of not managing a plan loan properly

Let’s compare two examples—Palmer and Shui. They’re both 50 years old and have the same income, the same amount saved in their plans, and the same contribution rate to those plans. The difference: Palmer reduces contributions for seven years, while Shui stops contributions for seven years. 


1 plan loan of $20,000

  • Reduces contributions from 14% ($875) to 8% ($500) to offset loan repayment of $375.
  • Resumes regular contribution rate of 14% two years after repayment.

403(b) account at age 67 with the loan:

403(b) account at age 67 without taking the loan:

That’s a $67,000 difference!

1 plan loan of $20,000

  • Stops contributing altogether by reducing contributions to 0% ($0).
  • Resumes regular contribution rate of 14% ($875) two years after repayment.

403(b) account at age 67 with the loan:

403(b) account at age 67 without taking the loan:

That’s a $152,000 difference!

Ending balances are shown in future dollars. Annual pay is $75,000 for the periods shown. The starting account balance is $100,000 with a contribution rate of 14%. Palmer reduces contributions and Shui stops contributions for seven years. Both loans have a five-year repayment period. The interest rate on the loan is 4.5%. The hypothetical annual rate of return is 5.25%. These examples are for illustration purposes and do not reflect any actual 403(b) plan loans or investments. No taxes or fees are applied. If they were, amounts would be lower. Earnings and pretax contributions are subject to taxes when withdrawn. Distributions before age 59.5 may also be subject to a 10% penalty. Contribution amounts are subject to IRS and Plan limits. Systematic investing does not ensure a profit or guarantee against a loss in a declining market. Consider your current and anticipated investment horizon when making an investment decision, as the illustration may not reflect this. The assumed rate of return used in this example is not guaranteed. Investments that have potential for 5.25% annual rate of return also come with risk of loss.


Weigh the consequences on your future financial security before you tap your UC 403(b) Plan account. If you have access to other means of funding, such as home equity, a family member, or other viable sources, you should consider these options as well.

If you’re looking at a 403(b) Plan loan to help with unmanageable debt payments, call your creditors first. Lenders—including credit card companies—can be very accommodating when you need help making your payments sustainable.

Finally, if you can’t avoid borrowing from your account, here are some helpful tips:

  • Pay it off on time and in full.
  • Avoid borrowing more than you need or too many times.
  • Continue saving for retirement.

It might be tempting to reduce or pause your contributions while you're paying off your loan, but keeping up with your regular contributions is essential to keeping your retirement strategy on track.