March > Retirement Corner
Six Facts You Should Know Before Borrowing from your UTSaver Account
You may be able to borrow from your UTSaver 403(b) Tax Sheltered Annuity (TSA) or your UTSaver 457(b) Deferred Compensation Plan, but is it a good idea? The terms may seem attractive compared with other alternatives, but below are six facts you should know before you borrow.
- UTSaver Plan Loans do offer some advantages.
- You can generally borrow up to 50% of your account balance, up to $50,000, for any reason.
- Interest rates are competitive.
- You borrow from yourself, because all principal and interest payments go straight back into your account.
- The money you borrow can’t grow for retirement.
When you take money out of your account, even for a limited time, it is simply not there to collect potential interest or dividends, or benefit from a rising market. By leaving your account untouched, you improve your opportunities for this type of growth.
- If you change jobs, you need to continue to pay back your loan.
If you leave UT System employment and don’t pay back what you owe according to the original terms of the loan, the outstanding amount will default and is considered a distribution. For the UTSaver 403(b) Tax Sheltered Annuity, this means you will owe ordinary income taxes on the amount you didn’t pay back, and possibly a penalty of an additional 10% if your under age 59 ½.
- You pay back loans with after-tax dollars.
When you take a loan from your UTSaver account, you borrow money that you put away on a pretax basis. And you pay it back with after-tax dollars, so taxes come into play:
- Once, when you pay taxes on your portion of your paycheck that goes to repay your loan
- And again, when you pay the taxes that come due when you finally withdraw your money.
- Restrictions and expenses may apply.
Each authorized provider may limit the amount of outstanding loans a participant can take at any one time. Additional restrictions may apply to certain products, such as Roth accounts.
- Finally, there may be better places to borrow the money you need.
If you qualify, a home equity loan or student loan may be a better deal than borrowing from your retirement plan. Both can offer attractive rates, as well as tax-deductible interest payments. Car loans can offer great rates, especially if you’re willing to shop for a lender or if there’s a factory incentive involved.
Courtesy Fidelity Investments
This information is intended for general informational purposes only. You should not consider it tax, legal or investment advice. In the event that anything in this newsletter conflicts with the UT System Retirement Program plan documents, UT System policies, or state or federal law, the UT System Retirement Program plan documents, UT System policies, or state or federal law will govern. Please consult your tax, legal or investment advisor for assistance with your personal situation.