Labor & Employment Law

Loans from retirement plans

Many public retirement plans offer members the opportunity to ?borrow? from their retirement plan. For example, the New York State Employees? Retirement System [ see http://www.osc.state.ny.us/retire/members/loans.htm ] and the New York State Teachers? Retirement System [ see http://www.nystrs.org/main/library/borrow.html ] allow their members to make such loans.

A loan is an amount that an individual borrows from a retirement plan account and then pays back with interest. If the borrowed amount is repaid, it is not taxed. However, for IRS purposes, the maximum amount that an individual may borrow is (1) the greater of $10,000 or 50% of the balance of your retirement plan account; or (2) $50,000, whichever is less. The IRS considers the total of all outstanding loans when determining the maximum amount that may be borrowed.

Further, there may be both Federal and State personal income tax consequences in the event the individual fails to repay the loan. Further, the unpaid loan is subject to an additional ?10% early withdrawal tax,? unless some exception to the ?early withdrawal tax? applies.

IRS Publication 575, Pension and Annuity Income, provides information on loans from retirement plans.

N.B. The IRS does not view borrowing money from an IRA-based plan such as a SEP or a Simple IRA as a loan from a retirement plan.

Full post as published by New York Public Personnel Law on October 06, 2008 (boomark / email).