How to Use a 403A as Collateral for a Loan

Plan documents

Retirement plans are regulated under federal law, which prohibits assignment or alienation of nonforfeitable interest in a trusteed employer-funded pension plan. The anti-alienation rule's purpose is to protect retirement assets from attachment by creditors. If the pension plan document permits borrowing, a collateral assignment is allowed up to the maximum plan loan, as stated in U.S. Code Section 72(p)(2)(A).

Instructions

1. Read the 403(a) employer-sponsored annuity plan documents to verify the loan provision or speak with a company retirement plan specialist about the borrowing options. Understand clearly the comparative cost of borrowing from the plan or taking a bank loan collateralized by the vested portion of the pension. Borrowing from the plan directly is usually less costly, because the loan interest charged may only be one to two percent greater than the interest credited to your share of the plan assets.

2. Confer with the outside lender about the federally mandated limits of his security interest and loan structure. The loan amount, term and repayment schedule must conform with the lending protocol permitted under the plan document, as prescribed under federal law. Failure to comply with these provisions will cause the loan portion of your annuity to be declared a distribution, taxable as ordinary income in the year received, and may incur an added 10 percent early withdrawal penalty.

3. See an attorney who practices retirement plan law and advises people on protecting plan assets from creditor attack. He can review the plan documents, loan and collateral agreements to assure they aren't in conflict with the latest federal and state statutes and amendments.

4. Consider any decision to borrow against future financial security very carefully. Only in the most dire circumstances should you tap into this tax-deferred growing asset. In the long term, the compound interest is substantial. When compounding is not blunted by annual taxation on gain, the cumulative effect is even greater. A participant loan won't be deemed an assignment or alienation if it's secured by accrued vested benefit, according to the Employee Retirement Security Act (ERISA), Section 206(d), as codified under U.S. Code Section 1056(d)(2). As long as this guideline is followed, you're permitted to use a 403(a) qualified pension plan as collateral.

References

• Cornell University Law School: U. S. Code: Section 72(p)(2)(A)
• IRS.gov: FAQ: Under what circumstances can a loan be taken from a qualified plan?
• BenefitsLink.com: ERISA in the United States Code: Title 29: Section 1056(d)(2)