How to Borrow Money From Your 401(k)

Yes, you can borrow against your 401(k), but the loan comes from your own account balance and must be repaid with interest

A 401(k) loan lets you borrow money from your own retirement savings while you're still employed. The loan is secured by your vested account balance—the portion of your contributions and employer matches that legally belong to you. You repay the loan to yourself through payroll deductions, and you pay interest on the borrowed amount, though that interest goes back into your own account rather than to a bank.

Not all 401(k) plans allow loans. Your plan document—the official rules your employer filed with the IRS—determines whether loans are permitted and under what terms. Even if loans are allowed, your employer can set stricter rules than the IRS minimum. Before assuming you can borrow, check with your plan administrator or benefits department to confirm your specific plan permits loans.

Key Takeaways

• You can borrow up to 50 percent of your vested account balance, or $50,000, whichever is less, though your plan may set a lower limit.
• The loan must be repaid within five years unless you use the money to buy a primary residence, in which case the repayment period can be longer.
• If you leave your job while a loan is outstanding, you typically must repay the full balance within 60 to 90 days or face taxes and penalties on the unpaid amount.
• Borrowed money stops earning investment returns while it sits as a loan, and you miss the growth that money would have generated in your account.
• Your plan administrator sets the interest rate, which is usually prime rate plus 1 or 2 percent, and that interest is paid back into your own account.

How much you can borrow and the repayment timeline

The IRS allows you to borrow up to 50 percent of your vested balance, with an absolute maximum of $50,000. If your vested balance is $60,000, you can borrow up to $30,000. If it's $80,000, you can still only borrow $50,000. Your plan may impose a lower limit, so the actual amount available to you depends on both the IRS rule and your employer's rules.

Standard repayment is five years, with payments made through payroll deduction. If you use the loan to buy or build a primary residence, many plans allow a longer repayment period—sometimes 10 to 15 years—though this varies by plan. The interest rate is set by your plan administrator and is typically the prime rate plus 1 or 2 percentage points. That interest accrues into your loan balance, and as you repay, the interest portion goes back into your 401(k) account.

Repayment happens automatically through your paycheck, which means the loan payments are deducted before taxes. This differs from a personal loan, where you repay with after-tax dollars. That tax advantage is one reason 401(k) loans can be cheaper than other borrowing options.

What happens if you leave your job with an outstanding loan

This is the most dangerous scenario for 401(k) borrowers. If you resign, are laid off, or are fired while you have an outstanding loan, your plan typically requires you to repay the full remaining balance within 60 to 90 days. The exact deadline is in your plan document.

If you don't repay the loan in full by that deadline, the IRS treats the unpaid balance as a taxable distribution. You owe income tax on the amount at your ordinary tax rate, and if you're under 59½, you also owe a 10 percent early withdrawal penalty. On a $30,000 unpaid loan, that could mean $9,000 to $12,000 in taxes and penalties depending on your tax bracket.

This risk is real and often overlooked. If you're considering a job change, a 401(k) loan becomes a liability you must plan to cover. Some people repay the loan before leaving a job specifically to avoid this trap. Others arrange a new employer's 401(k) to accept a rollover of the loan amount, though not all plans permit this.

The opportunity cost of borrowed money

When you borrow $30,000 from your 401(k), that $30,000 stops earning investment returns. It sits as a loan balance instead of being invested in your plan's funds. Over five years, that forgone growth can be substantial. If your account would have earned 7 percent annually, that $30,000 would grow to roughly $42,000. Instead, you're repaying $30,000 plus interest at prime plus 1 or 2 percent—typically 6 to 8 percent—which is lower than market returns but still represents money that could have compounded.

The math gets worse if the market performs well during your repayment period. You're locked into repaying a fixed amount while missing out on potential gains. Conversely, if the market declines, you've protected that portion of your balance from losses, though that's rarely a reason to borrow intentionally.

This opportunity cost is invisible because you don't see a bill for it. But it's real and permanent—that growth never happens, and you can't make it up later.

When a 401(k) loan makes sense versus other options

A 401(k) loan is most defensible when you need money for a genuine short-term need and have no other source. Buying a primary residence is the clearest case—you're building equity, the loan period can be extended, and you're borrowing at a rate lower than a mortgage. An emergency medical expense or home repair might also justify a loan if you have no emergency savings and can't borrow from family.

A 401(k) loan is usually a poor choice for credit card debt, a car purchase, or general cash flow problems. In those cases, you're better served by a personal loan, a home equity line of credit, or addressing the underlying spending issue. Borrowing from retirement to cover non-retirement expenses is borrowing against your future security.

Before taking a loan, exhaust other options: a personal loan from a bank or credit union, a 0 percent promotional credit card if you have good credit, a loan from family, or a payment plan with the creditor. If none of those work and you still need the money, then consider the 401(k) loan—but only if you're confident you can repay it before leaving your job.

Loans versus hardship withdrawals

Some 401(k) plans also permit hardship withdrawals, which are different from loans. A hardship withdrawal lets you take money out permanently, not as a loan. You don't repay it, but you owe income tax on the amount and a 10 percent early withdrawal penalty if you're under 59½. The IRS allows hardship withdrawals only for specific reasons: medical expenses, home purchase, education, preventing eviction or foreclosure, or burial expenses.

A loan is almost always preferable to a hardship withdrawal because you repay it and keep the money in your retirement account. With a withdrawal, the money is gone and taxed. However, if you're certain you can't repay a loan—for example, you're leaving your job and can't cover the balance—a hardship withdrawal might be the lesser evil, depending on your circumstances and whether your plan permits it.

How to request a 401(k) loan from your plan

Contact your plan administrator or benefits department and ask for the loan request form. This is usually available through your plan's website or by calling the benefits helpline. You'll provide basic information: the amount you want to borrow, the reason (if your plan asks), and your repayment preference.

The plan administrator reviews your request to confirm you have sufficient vested balance and that the loan amount doesn't exceed the plan's limits. Approval typically takes one to two weeks. Once approved, the money is deposited into a designated bank account or issued as a check. Repayment begins on the schedule your plan sets, usually within 30 to 60 days of the loan being funded.

Keep records of all loan documents, repayment statements, and correspondence with your plan administrator. If you change jobs or the plan is terminated, you'll need proof of the loan terms and your repayment history.

Frequently Asked Questions

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

Yes, Solo 401(k) plans can include loan provisions. However, if you're the only employee, you cannot borrow from your own Solo 401(k)—the IRS prohibits loans to self-employed individuals in their own plans. If you have employees, the rules change, so consult a tax professional.

What if I can't repay the loan before I leave my job?

You have 60 to 90 days (depending on your plan) to repay the full balance after leaving. If you don't, the unpaid amount is treated as a taxable distribution, and you owe income tax plus a 10 percent early withdrawal penalty if you're under 59½. Some employers allow you to repay the loan even after you've left, so ask your plan administrator about this option.

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

No. A 401(k) loan doesn't appear on your credit report and doesn't affect your credit score because you're borrowing from yourself, not from a lender. However, if you default on the loan, the consequences for your retirement savings are severe.

Can I take out a second 401(k) loan while repaying the first one?

Your plan may allow multiple loans, but the total borrowed cannot exceed 50 percent of your vested balance or $50,000. If you have one $25,000 loan outstanding, you could potentially borrow another $25,000, but this depends on your plan's rules. Check with your administrator before assuming you can take a second loan.

Is the interest I pay on a 401(k) loan tax-deductible?

No. Unlike mortgage interest or student loan interest, 401(k) loan interest is not tax-deductible. However, the interest does go back into your own account, so you're not losing it entirely—it's just not deductible on your tax return.