Borrowing From Your 457(b):

A Firefighter’s Perspective on Smart Money Moves

As a firefighter, you’ve spent years running into danger to protect others. Hopefully, you’ve been saving in a deferred compensation plan, and your 457(b) account is steadily growing—a testament to your hard work and discipline. But life has a way of presenting opportunities and challenges long before retirement arrives.

What if you’re considering borrowing from that account? Let’s break it down in a way that makes sense, especially for those big decisions, like investing in yourself, your dreams, or even weathering unexpected financial storms.

How Does a 457(b) Loan Work?

Taking a loan from your 457(b) is like borrowing from your future self. You repay the loan (with interest) back into your own account. But because the loan temporarily reduces your balance, you lose out on potential investment growth. Here's an example to help explain the impact.

Understanding the Numbers

Let’s say you have $40,000 in your 457(b) and decide to take a $20,000 loan. Here’s how it breaks down:

1. Loan Amount and Interest 

   • You borrow $20,000 at an interest rate of 10.5%.

   • That interest is paid back into your account, so technically, you’re repaying yourself.

2. Processing Fees 

   • A $50 processing fee comes off your balance, so your account drops to $19,950.

3. Repayment Process 

   • You’ll repay the loan through EFT deductions (from your bank account), including the interest.

During this repayment period, your account is $20,000 smaller, which means you’re missing out on potential investment growth on that amount. Even though you’re paying yourself back, the opportunity cost of not having that money invested could affect your retirement savings over time.

Is It Ever a Good Idea?

Sure—but only if the math and the purpose make sense.

Take Alex, for example. He’s been a firefighter for over 15 years and has always dreamed of owning a food truck. When a fantastic deal comes along, Alex sees this as his chance to create a new income stream for the future.

Alex takes a $20,000 loan from his 457(b) to help buy the truck. He knows the interest rate is 10.5%, but he runs the numbers carefully. With his projected food truck earnings, he expects to make a return far greater than the interest he’s paying. This isn’t just a financial move—it’s an investment in his dreams and his future.

However, Alex also considers the trade-offs. By borrowing $20,000, he’s reducing his account balance and missing out on potential growth while the loan is repaid. He factors that in and decides the long-term benefits outweigh the costs.

Key Takeaways Before Borrowing

Before you make a decision, ask yourself:

• What’s the purpose? Is this loan going toward something that adds value, like education, starting a business, or an emergency?

• Can you afford the repayments? Missing payments could lead to:

  • Tax consequences

  • Losing the ability to return the funds to your retirement account

  • Being unable to take out another loan in the future

• What’s your ROI? If you’re borrowing to invest in yourself or your future, will the returns justify the cost of the loan?

The Bigger Picture

Borrowing from your 457(b) isn’t a perfect solution, but it’s an option. Like Alex, if you’re strategic and thoughtful, it can be a way to invest in your future. Whether you’re starting a side hustle, handling a family emergency, or exploring new opportunities, understanding the numbers and making informed choices is key.

Remember, it’s not just about taking a loan—it’s about taking control. Plan carefully, and you’ll set yourself up for success, both now and in retirement