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

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 borrow up to 50% of your vested balance, with a maximum of $50,000. The loan is not a withdrawal—you keep the borrowed amount in the plan, and you repay it through payroll deductions, usually over five years. The interest rate is typically the prime rate plus 1%, set by your plan administrator when you take the loan.

The catch is that while you repay the loan, that money sits outside your investment accounts and earns no growth. If you leave your job, the loan becomes due in full within a short window—often 60 to 90 days—or it is treated as a withdrawal and taxed as income plus a 10% penalty if you are under 59½. This makes a 401(k) loan a tool for short-term needs, not a substitute for an emergency fund.

Key Takeaways

• You can borrow up to 50% of your vested 401(k) balance, capped at $50,000, and repay it over five years through payroll deductions.
• The interest rate is set by your plan and is typically the prime rate plus 1%, and you pay that interest back into your own account.
• If you leave your job, the full loan balance becomes due within 60 to 90 days or it converts to a taxable withdrawal with a 10% penalty if you are under 59½.
• While you repay the loan, the borrowed amount does not grow, so you lose potential investment returns on that money.
• Not all 401(k) plans allow loans—check your plan documents or ask your HR department whether borrowing is an option.

How the borrowing process works

To borrow from your 401(k), you contact your plan administrator—usually the company that manages your plan, not your employer directly. You fill out a loan request form and specify the amount you want to borrow. The administrator calculates your vested balance (the portion of your account you own outright, separate from employer matching that may still be restricted) and confirms you do not exceed the 50% limit or the $50,000 cap.

Once approved, the money is typically deposited into your bank account within a few business days. Your employer then sets up a repayment schedule through payroll deductions. Each paycheck, a portion of your loan payment is withheld and sent back to your 401(k) account. You also pay interest on the loan, which goes into your account as well, so you are rebuilding your balance as you repay.

The entire process usually takes one to two weeks from application to receiving the funds. Some plans allow you to take multiple loans at once, though most cap the total number of active loans you can have—often at two.

Interest rates and repayment terms

Your plan administrator sets the interest rate, which is almost always the prime rate published in the Wall Street Journal on a specific date, plus 1 percentage point. As of early 2024, the prime rate is around 8.5%, so a typical 401(k) loan rate would be approximately 9.5%. This rate is locked in when you take the loan and does not change, even if the prime rate moves.

Repayment terms are usually five years for a general loan, though some plans allow longer terms if you are borrowing to buy a primary residence. You repay through payroll deductions, so the payment is automatic and comes out before taxes. If you are paid biweekly, you might repay $200 to $300 per paycheck depending on the loan size and term.

Because you pay interest into your own account, the interest is not a total loss the way it would be with a bank loan. However, you do lose the opportunity for that borrowed amount to grow in the market. If your 401(k) historically returns 7% per year and you are paying 9.5% interest, you are paying more than you would have earned—but you are also paying yourself, not a lender.

What happens if you leave your job

This is the most dangerous part of a 401(k) loan. If you resign, are laid off, or are fired, your loan is typically due in full within 60 to 90 days. If you cannot repay it, the unpaid balance is treated as a withdrawal from your 401(k). You owe income tax on the full amount, and if you are under 59½, you also owe a 10% early withdrawal penalty.

For example, if you borrowed $20,000 and leave your job with $15,000 still outstanding, that $15,000 is taxed as income in the year you leave. If you are in the 22% tax bracket and under 59½, you owe roughly $3,300 in taxes plus $1,500 in penalties—$4,800 total—just to cover the unpaid loan. That amount is usually withheld from your final paycheck or you receive a bill from the IRS.

Some plans allow you to repay the loan after you leave, but you must do so within the window specified in your plan documents—usually 60 to 90 days. You repay directly to the plan, not through payroll. If you miss the deadline, the loan is treated as a distribution and taxed accordingly.

Comparing a 401(k) loan to other options

A 401(k) loan makes sense only if you have exhausted other options and need money for a short-term need. A personal bank loan or credit card typically charges 6% to 21% interest, so a 401(k) loan at 9.5% is often cheaper. However, a bank loan does not put your retirement savings at risk if you lose your job.

A home equity line of credit (HELOC) or home equity loan is usually cheaper than a 401(k) loan if you own a home, because interest rates are lower and you do not risk your retirement account. The tradeoff is that you put your home at risk if you cannot repay.

An emergency fund—three to six months of expenses in a savings account—is the best option if you have time to build one. It costs nothing, carries no risk, and is available immediately. If you do not have an emergency fund and are considering a 401(k) loan, that is a sign to build one after you repay the loan.

Tax treatment of 401(k) loans

The loan itself is not taxed when you take it—you are borrowing your own money. The interest you pay is also not immediately deductible on your tax return, even though it goes into your 401(k) account. When you eventually withdraw the money in retirement, you will not pay tax on the interest you paid yourself, because it is already in your account as part of your balance.

If you default on the loan and it is treated as a withdrawal, the unpaid balance is added to your taxable income for that year. If you are under 59½, the 10% early withdrawal penalty applies to the unpaid amount. This is reported on Form 1099-R, which you receive from your plan administrator, and you report it on your tax return.

If you take a loan and then roll over your 401(k) to an IRA, the loan is treated as a distribution and becomes taxable. This is a common mistake when changing jobs—always repay an outstanding 401(k) loan before rolling over your account.

Reasons not to take a 401(k) loan

The biggest risk is job loss. If you are in an unstable industry or worried about layoffs, a 401(k) loan is dangerous because you could face a large tax bill if you cannot repay it quickly. Even if you find another job, you still have only 60 to 90 days to repay the full balance.

A second risk is opportunity cost. Money borrowed from your 401(k) stops growing. If you borrow $20,000 for five years and the market returns 7% annually, you lose roughly $5,000 in growth on that amount. You are paying 9.5% interest to avoid losing 7% in returns—a net cost of about 2.5% per year on top of the interest itself.

A third risk is that taking a loan can reduce your retirement savings significantly. If you borrow $50,000 at age 40 and repay it over five years, you have five years of lost growth on that $50,000. By age 65, that lost growth could amount to $100,000 or more, depending on market returns.

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 under the same rules as employer plans—up to 50% of your vested balance or $50,000, whichever is less. However, you cannot borrow from a SEP-IRA or Solo Roth IRA, which do not allow loans at all. Check your specific plan documents to confirm.

What if I cannot repay the loan before I leave my job?

Contact your plan administrator immediately and ask about repayment options. Some plans allow you to repay the loan after you leave, usually within 60 to 90 days. If you cannot repay within that window, the unpaid balance is treated as a taxable withdrawal and you owe income tax plus a 10% penalty if you are under 59½.

Does taking a 401(k) loan hurt my credit score?

No, a 401(k) loan does not appear on your credit report and does not affect your credit score. It is not a debt to a lender—it is a loan from yourself. However, if you default and it becomes a taxable withdrawal, the resulting tax bill could affect your finances if you cannot pay it.

Can I take a loan from my 401(k) to pay off credit card debt?

Technically yes, but it is usually a bad idea. You are replacing high-interest debt (credit card rates are often 15% to 25%) with a lower-rate loan (9.5%), which saves money on interest. However, you are also putting your retirement savings at risk. If you lose your job, the loan becomes due and you are back in financial trouble.

What happens to my loan if I die?

The unpaid loan balance is deducted from your 401(k) account before it is distributed to your beneficiaries. If you have a $100,000 balance and an outstanding $20,000 loan, your beneficiaries receive $80,000. The loan does not become the beneficiary's responsibility.