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 money and you repay it to yourself with interest

Most 401(k) plans allow you to borrow against your vested balance—the money that legally belongs to you after you meet your employer's vesting schedule. The loan amount typically cannot exceed 50% of your vested balance or $69,000, whichever is less. The IRS sets the $69,000 limit, though it adjusts annually for inflation.

When you borrow, you are not withdrawing the money permanently. You repay the loan through payroll deductions, usually over five years, though some plans allow longer repayment periods for loans used to buy a primary residence. The interest rate is set by your plan administrator and is typically the prime rate plus 1 to 2 percentage points. That interest goes back into your 401(k) account, not to a bank or lender.

The mechanics are straightforward: you request a loan through your plan administrator, the money is transferred to you, and repayment begins within a set timeframe—often 60 to 90 days after the loan is issued. Your plan administrator handles the paperwork and tracks the repayment schedule.

Key Takeaways

• A 401(k) loan lets you borrow up to 50% of your vested balance or $69,000, whichever is smaller, and you repay yourself with interest over a set period.
• If you leave your job, most plans require you to repay the full loan balance within 60 to 90 days or face taxes and penalties on the unpaid amount.
• Loans reduce the money growing tax-deferred in your account, and you lose the growth on borrowed funds for as long as the loan is outstanding.
• Borrowing does not trigger immediate taxes, but defaulting on the loan treats the unpaid balance as a withdrawal subject to income tax and a 10% early withdrawal penalty if you are under 59½.

How the loan amount is calculated

Your plan administrator determines your vested balance by looking at contributions you have made, employer matches you have earned, and any investment gains, minus any previous loans still outstanding. If your plan has a vesting schedule—meaning you own a percentage of employer contributions based on years of service—only the vested portion counts toward the borrowing limit.

The 50% rule means if your vested balance is $100,000, you can borrow up to $50,000. If your vested balance is $200,000, the 50% calculation gives you $100,000, but the IRS cap of $69,000 applies, so you can borrow only $69,000. The limit resets each year based on your current vested balance.

Some plans allow you to borrow less than the maximum. There is no requirement to take the full amount you are permitted to borrow. You can request $10,000 even if you are allowed $50,000.

What happens to your account while you repay

The borrowed amount is removed from your 401(k) balance immediately. That money is no longer invested and no longer earning returns. If the stock market rises 8% in a year and you have borrowed $30,000, you miss out on the $2,400 in growth that $30,000 would have earned.

Your repayments go back into your account and resume being invested according to your fund selections. The interest portion of each payment also goes into your account. However, the opportunity cost—the growth you missed while the money was borrowed—cannot be recovered.

This is different from a withdrawal. A withdrawal is permanent; a loan is temporary. But the temporary absence still has a real cost in forgone investment growth.

The tax and penalty consequences of defaulting

If you leave your job and do not repay the loan within the timeframe your plan specifies—usually 60 to 90 days—the unpaid balance is treated as a taxable distribution. You owe income tax on the full amount at your ordinary tax rate. If you are under 59½, you also owe a 10% early withdrawal penalty on top of the income tax.

Example: You borrow $40,000 and leave your job before repaying it. Your plan gives you 90 days to repay. If you do not repay within that window and you are 45 years old, the $40,000 is treated as a withdrawal. If you are in the 22% tax bracket, you owe $8,800 in federal income tax plus $4,000 in the early withdrawal penalty—$12,800 total. Your state may also tax the amount.

Some plans allow you to roll the loan into an IRA or another employer plan if you change jobs, which avoids the default. Check with your new plan administrator or an IRA custodian before you leave your job to see whether this option is available to you.

When a 401(k) loan makes sense

A loan can be useful when you need cash for a genuine emergency and you have no other source—no savings, no credit available, no family loan. The interest rate is usually lower than a personal loan or credit card, and you are borrowing from yourself rather than a lender.

A loan also makes sense if you plan to stay in your job long enough to repay it fully. If your employer matches contributions, you continue earning the match while repaying the loan, which helps offset the opportunity cost.

A loan is less attractive if you are close to leaving your job, changing careers, or facing job uncertainty. The default risk is too high. It is also less attractive if you are already behind on retirement savings, because the borrowed amount stops growing and you are essentially borrowing from your future self at the cost of compound growth.

Alternatives to borrowing from your 401(k)

A hardship withdrawal is a permanent withdrawal allowed by some plans for specific financial hardships—medical expenses, home purchase, education costs, or preventing eviction. Hardship withdrawals are taxed and penalized like early withdrawals, but they do not require repayment. They are permanent losses to your retirement account, so they should be a last resort.

A personal loan from a bank or credit union keeps your 401(k) intact and growing. The interest rate may be higher than a 401(k) loan, but you avoid the default risk and the opportunity cost of borrowed funds sitting idle in your retirement account.

A home equity line of credit (HELOC) or home equity loan uses your home as collateral and often carries a lower interest rate than a personal loan. This option is available only if you own a home with equity.

A credit card cash advance or short-term personal loan is expensive but may be appropriate if you need money for only a few weeks or months and can repay quickly.

The math: what a 401(k) loan actually costs

The true cost of a 401(k) loan is not just the interest you pay—it is the interest plus the forgone growth on the borrowed amount.

Suppose you borrow $30,000 at 7% interest over five years. Your monthly payment is about $566. Over five years, you pay roughly $3,960 in interest, which goes back into your account. But if your investments would have grown at 8% annually, that $30,000 would have become about $44,100 in five years. By borrowing it, you give up roughly $14,100 in potential growth. The true cost is the $3,960 in interest plus the $14,100 in forgone growth—about $18,060 total.

This calculation assumes you repay on schedule and stay invested at 8% growth. If the market performs differently or you default, the actual cost changes. The point is that a 401(k) loan is not free, even though you are borrowing from yourself.

Frequently Asked Questions

What if I have multiple 401(k)s from different jobs?

The $69,000 borrowing limit applies across all your 401(k) plans combined, not per plan. If you have a current 401(k) with $100,000 and an old 401(k) with $50,000, your total borrowing limit is still $69,000 (or 50% of your combined vested balance, whichever is less). Check with each plan administrator to understand how they coordinate the limit.

Can I borrow from a 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. However, if you are the only employee, you cannot borrow from a SEP-IRA or SIMPLE IRA. Consult your plan documents or a tax professional to confirm your specific plan's loan rules.

Does borrowing from my 401(k) affect my credit score?

No, a 401(k) loan does not appear on your credit report and does not affect your credit score. It is an internal transaction within your retirement account, not a loan from a lender that reports to credit bureaus.

What happens to my loan if I am laid off?

Most plans require you to repay the full outstanding balance within 60 to 90 days of separation from employment. If you do not repay, the unpaid amount is treated as a taxable distribution subject to income tax and, if you are under 59½, a 10% early withdrawal penalty. Some plans allow a direct rollover of the loan to an IRA or another employer plan, which avoids the default.

Can I take out a second loan if I already have one outstanding?

Yes, if your plan allows it. However, the total of all outstanding loans cannot exceed 50% of your vested balance or $69,000. If you have a $30,000 loan outstanding and your vested balance is $100,000, you can borrow up to $20,000 more (50% of $100,000 is $50,000, minus the $30,000 already borrowed). Check your plan documents for rules on multiple loans.