Q&A: Borrowing from your retirement plan

Q: I'm finding that bank financing is a little tight right now. Can I borrow from my practice retirement plan?

A: In some cases you can borrow from your retirement plan, but you should be aware that there are several limits and restrictions. Although a retirement plan may allow a loan to a plan participant, it's not required to, so be sure your plan has the appropriate language authorizing participant loans. If a plan provides for loans, it may limit the amount that can be taken. The maximum amount that the plan can permit as a loan is either the greater of $10,000 or 50 percent of your vested account balance, or $50,000, whichever is less. Repayment of the loan must occur within five years, and payments must be made in substantially equal amounts that are paid at least quarterly. If you own more than 5 percent of the practice, any interest you pay on the loan isn't deductible. A loan that is taken for the purpose of purchasing your principal residence can be paid back during a period of more than five years. If a retirement loan isn't repaid, it's considered a "deemed distribution" of the unpaid loan balance. That means you will have additional taxable income in the year that the loan was unpaid. And if you're not 59.5 years old, you'll also pay a 10 percent penalty on the deemed distribution.