Loans from tax-deferred retirement plans must bear a reasonable rate of interest, similar to commercial lending rates. Often, retirement plans charge anywhere from the prime rate to two points over prime. Currently, the banks’ prime lending rate is 4.25 percent, so interest rates likely will be in the range of 4.25 percent-6.25 percent.
Plan loans must be repaid within five years but home loans may have longer repayment schedules. Retirement plan participants often can borrow as much as 100 percent of their vested plan balance, up to $10,000; if the plan balance is over $20,000, a plan loan can be as much as half of the vested benefits, up to a maximum of $50,000.
If a plan loan is used to acquire a personal residence and the proceeds are used to purchase the house, the term may exceed five years. In some circumstances, the interest on a plan loan used to acquire a principal resident may be tax-deductible.
