How to Borrow From Your 401(k) and What It Costs You

Yes, you can borrow from your 401(k), but the loan comes from your own balance and you repay it to yourself with interest

Most 401(k) plans allow you to take a loan against your vested balance — the money that legally belongs to you, not your employer's matching contribution that hasn't yet vested. You borrow from your own account, not from the plan's general fund. The plan administrator sets the terms: how much you can borrow, the interest rate, and the repayment schedule. You then repay the loan through payroll deductions, and the interest you pay goes back into your own 401(k) account.

The key difference from a regular loan is that you are not borrowing from a bank or lender. No credit check happens. No outside party approves or denies you. The plan itself is the lender, and the rules are written into your plan document — the legal agreement between your employer and the plan administrator that spells out what participants can and cannot do.

Key Takeaways

• You can borrow up to 50% of your vested 401(k) balance, or $69,000, whichever is less, though your plan document may set a lower limit.
• The interest rate is typically the prime rate plus 1% to 2%, and that interest goes back into your own account, not to a bank.
• You must repay the loan within five years unless you use the money to buy a primary residence, which may allow a longer term.
• If you leave your job before the loan is repaid, you usually have 60 to 90 days to pay back the full balance or face taxes and penalties on the unpaid amount.
• Borrowing reduces the money that stays invested and growing, which can cost you significantly in retirement savings over time.

How much you can borrow and what limits apply

The federal limit is 50% of your vested account balance or $69,000, whichever is lower. If your vested balance is $100,000, you can borrow up to $50,000. If your vested balance is $120,000, you can still only borrow $69,000 because that is the absolute cap. Your plan document may impose a stricter limit — some employers allow only $50,000 regardless of your balance, or require that you leave at least $10,000 in the account after borrowing.

The vested balance is what matters. If your employer matches contributions but you have not yet vested in that match, those matching dollars do not count toward your borrowing limit. Only the money that is legally yours — your own contributions and any vested employer match — can be borrowed against. Your plan administrator can tell you your vested balance in one call or through your online account portal.

Some plans do not allow loans at all. If your plan does not offer a loan provision, you cannot borrow, period. Check your plan document or call your plan administrator to confirm whether loans are available to you.

Interest rates and how repayment works

The interest rate is set by your plan and is typically the prime rate plus 1% to 2%. As of early 2024, prime rate is around 8.5%, so a plan charging prime plus 1.5% would charge roughly 10% interest. This rate is fixed for the life of the loan. Unlike a credit card, the rate does not change month to month.

You repay through payroll deductions — the plan administrator arranges for your employer to withhold the loan payment from each paycheck and send it to the plan. The payment includes both principal and interest. The interest portion goes back into your 401(k) account as if you had earned it, so you are not losing that money entirely. The principal portion reduces your loan balance.

Repayment must be completed within five years for most loans. If you borrow to buy a primary residence — a home you will live in — some plans allow a longer repayment period, sometimes 10 or 15 years. Your plan document specifies which loans may have access to for extended terms.

What happens if you leave your job before the loan is repaid

This is where 401(k) loans create real risk. If you leave your employer — whether you quit, are laid off, or retire — you typically have 60 to 90 days to repay the entire outstanding loan balance in full. If you do not, the unpaid amount is treated as a distribution from your 401(k). That distribution is subject to income tax at your ordinary tax rate, and if you are under 59½, you also owe a 10% early withdrawal penalty on top of the income tax.

Example: You borrow $30,000 at age 45. Two years later, you change jobs. You have 60 days to repay the remaining $25,000. If you cannot, that $25,000 is taxed as income plus a 10% penalty. At a 24% tax bracket, you owe roughly $8,500 in taxes and penalties on money you thought you were borrowing from yourself. The unpaid loan balance is gone from your retirement account, and you have a tax bill due.

Some plans offer a grace period or allow you to roll the loan into an IRA if you leave, but this is not standard. Read your plan document or ask your administrator what happens to your loan if you separate from service.

The hidden cost: lost investment growth

When you borrow $30,000 from your 401(k), that $30,000 stops growing. It is no longer invested in stocks, bonds, or mutual funds. Over 20 or 30 years until retirement, that money would have compounded. At a 7% average annual return, $30,000 grows to roughly $180,000 by retirement. If you borrow it for five years and repay it, you have lost the growth on that money for those five years, even though you repaid the principal.

The interest you pay back into your account does not fully make up for this lost growth. You are paying yourself interest at 10%, but your investments might have returned 7% or 8% or more. You are also paying with after-tax dollars — the money you use to repay the loan comes from your paycheck after income tax is withheld. This compounds the real cost of borrowing.

For a short-term need, this cost may be worth it compared to a credit card or personal loan at 15% to 25% interest. For a discretionary purchase or to cover poor planning, the cost is usually not worth it.

When a 401(k) loan makes sense and when it does not

A 401(k) loan is most defensible when you face a genuine short-term emergency — a medical bill not covered by insurance, a car repair that keeps you working, a home repair that prevents foreclosure — and you have no other source of funds. The interest rate is lower than credit cards or personal loans, and you are not borrowing from a bank that profits from your interest payments.

A 401(k) loan makes less sense when you are borrowing for a vacation, a wedding, or to pay off credit card debt that you will run back up. It also makes less sense if you are not confident you will stay in your job for the full repayment period, because leaving employment creates the tax and penalty trap described above.

Before you borrow, explore alternatives: a personal loan from a credit union, a 0% balance transfer credit card if your credit is good, a loan from family, or simply delaying the purchase. Each has a different cost and risk profile. A 401(k) loan should be a last resort, not a first option.

How to request a loan from your plan

Contact your plan administrator — the company or organization that manages your 401(k). This is often a large financial services firm like Fidelity, Vanguard, Schwab, or Empower, though some large employers administer their own plans. You can find the administrator's contact information on your most recent 401(k) statement or by asking your employer's benefits department.

The administrator will provide a loan application form. You will need to specify the loan amount, the reason for the loan (though this is often just for record-keeping), and your preferred repayment term. The administrator will calculate your maximum borrowing limit based on your vested balance and your plan's rules, then process the loan. Approval typically takes one to two weeks.

Once approved, the funds are usually deposited into a bank account you designate. Repayment begins on the schedule set by the plan — often the first paycheck after the loan is funded. Your employer's payroll system coordinates with the plan administrator to withhold your loan payment each pay period.

Frequently Asked Questions

Can I borrow from my 401(k) if I am self-employed or have a Solo 401(k)?

Yes, Solo 401(k) plans allow loans if the plan document includes a loan provision. However, you cannot borrow from a SEP-IRA or Solo IRA — those accounts do not permit loans under any circumstances. If you have a Solo 401(k), check your plan document or contact your plan administrator to confirm loans are available.

What happens to my loan if I die before it is repaid?

The unpaid loan balance is treated as a distribution from your 401(k) to your beneficiary. Your beneficiary receives the remaining account balance after the loan is deducted. The unpaid loan amount is not forgiven, and your beneficiary does not owe taxes on it — it simply reduces what they inherit.

Can I borrow from my 401(k) while I am still working?

Yes. You do not have to leave your job or retire to take a loan. You can borrow while actively employed and repay through payroll deductions. However, if you leave that job before the loan is repaid, the 60-to-90-day repayment deadline applies.

If I repay my 401(k) loan early, do I save money on interest?

Yes. If you repay early, you stop accruing interest immediately. The sooner you repay, the less total interest you pay. There is no penalty for early repayment — you can pay off the loan in full at any time without cost.

Can I borrow from my 401(k) to pay off credit card debt?

Technically yes, but it is usually not a good idea. If you borrow to pay off credit cards but then run the cards back up, you end up with both a 401(k) loan and new credit card debt. You are also using retirement money to solve a spending problem that will return. A better approach is to address the spending first, then consider other options.