How to Borrow Money From Your 401(k) Plan

A 401(k) loan lets you borrow from your own retirement savings and pay yourself back with interest

A 401(k) loan is a withdrawal of money from your retirement account that you repay over time, usually through payroll deductions. You borrow from your own balance, not from a bank or lender. The loan comes with interest, but you pay that interest to yourself—it goes back into your account. The IRS allows this only if your plan document permits it; not every employer plan offers loans, so your first step is to check your plan's summary or call your plan administrator.

The appeal is straightforward: you avoid the credit check and approval process of a bank loan, and you keep the interest earnings in your retirement account instead of paying a bank. The catch is that you must repay the loan on schedule, and if you leave your job before it's paid off, the rules change sharply. A missed payment or default can trigger taxes and penalties that turn a loan into a costly withdrawal.

Key Takeaways

• You can borrow up to 50 percent of your vested balance or $69,000, whichever is less, though your plan may set a lower limit.
• Repayment terms are typically five years for general loans, but loans taken to buy a primary residence may allow up to 15 years.
• If you leave your job before the loan is repaid, you usually must repay the full remaining balance within 60 days or face income tax and a 10 percent penalty on the unpaid amount.
• The interest rate is set by your plan administrator and is typically the prime rate plus 1 to 2 percent, but you pay that interest back into your own account.
• Loan payments are made through payroll deduction and do not reduce your ability to make regular 401(k) contributions.

Borrowing limits and how they are calculated

The IRS sets a ceiling: you can borrow the lesser of 50 percent of your vested account balance or $69,000. The $69,000 figure is the 2024 limit and changes annually. If your vested balance is $100,000, you can borrow up to $50,000. If it is $200,000, you can still only borrow $69,000. If you have an outstanding loan from the same plan, the $69,000 limit applies to your total loans, not each one separately.

Your plan document may impose a lower limit—some employers cap loans at $50,000 or require a minimum loan amount. Check your plan summary or contact your plan administrator to learn what your specific plan allows. The vested balance is the portion of your account that legally belongs to you; unvested money (often employer matching contributions still subject to a vesting schedule) does not count toward the borrowing limit.

Interest rates and who receives the payments

Your plan administrator sets the interest rate, typically the prime rate plus 1 to 2 percentage points. The prime rate changes, so your rate may be fixed at the time you take the loan or may adjust if your plan allows it. Unlike a bank loan, every dollar of interest you pay goes directly back into your 401(k) account. This means you are not losing that money to a third party; it remains part of your retirement savings and continues to grow tax-deferred.

Payments are usually deducted from your paycheck automatically, which makes it hard to miss a payment. If you are self-employed or your employer does not offer payroll deduction, you may be required to make payments directly to the plan, typically quarterly. Your plan administrator will provide the payment schedule and instructions.

Repayment terms and timelines

Most 401(k) loans must be repaid within five years. This is the standard term set by the IRS for general-purpose loans. However, if you use the loan to buy or build a primary residence—your main home, not a vacation property or investment property—your plan may allow a longer repayment period, often up to 15 years. Your plan document will specify which loans may have access to for the extended term.

The repayment schedule is fixed when you take the loan. If you borrow $20,000 at 7 percent interest over five years, your monthly payment will be roughly $396, and that amount stays the same throughout the loan term. You cannot extend the repayment period or reduce the payment if your circumstances change, though some plans allow you to take out a second loan if you need additional funds.

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

This is the most dangerous scenario. If you separate from your employer while a loan is outstanding, most plans require you to repay the full remaining balance within 60 days. If you do not, the unpaid balance is treated as a distribution—a withdrawal—and becomes subject to income tax at your ordinary tax rate. If you are under 59½, it also triggers a 10 percent early withdrawal penalty on the unpaid amount.

Example: You borrowed $30,000 and have repaid $10,000. You leave your job with $20,000 still owed. If you cannot repay it within 60 days and you are 45 years old, that $20,000 is taxed as income plus a $2,000 penalty (10 percent). If you are in the 22 percent tax bracket, you owe roughly $6,400 in taxes and penalties on money you thought was a loan, not a withdrawal. Some plans allow a longer repayment window or a rollover to an IRA to preserve the loan status, but this varies by plan. Check your plan documents or ask your administrator what happens in a separation scenario.

Tax treatment and how loans differ from withdrawals

A 401(k) loan is not a taxable event at the time you take it. You do not report it as income, and you do not owe taxes on the amount borrowed. This is the key difference from a withdrawal: a withdrawal is taxed immediately, but a loan is not. However, the interest you pay is not tax-deductible—you cannot write it off on your tax return, even though it goes back into your retirement account.

When you repay the loan, you are using after-tax dollars. This means that portion of your account will have already been taxed when you withdraw it in retirement. The interest portion will be taxed again when you withdraw it later, which is a form of double taxation. This is a real cost of borrowing from your 401(k), though it is often overlooked. A withdrawal, by contrast, is taxed once at withdrawal time, but the full amount is subject to tax.

Comparing 401(k) loans to other borrowing options

A personal bank loan typically charges 8 to 36 percent interest depending on your credit score, and you have no control over the rate. A 401(k) loan usually costs 6 to 9 percent and the interest goes back into your account. A home equity line of credit (HELOC) may offer lower rates if you own a home, but it puts your house at risk if you cannot repay. A credit card cash advance can be obtained instantly but charges 25 to 30 percent or more.

The trade-off with a 401(k) loan is that you reduce your retirement savings during the loan period—the borrowed amount is not growing in the market—and you face a cliff if you leave your job. If you are certain you will stay with your employer for the full repayment term and you need money urgently, a 401(k) loan may cost less than alternatives. If your job is uncertain or you may need to leave within five years, the risk of default and penalties often makes other borrowing cheaper in the long run.

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

Contact your plan administrator—this is usually your employer's benefits department, a third-party administrator hired by your employer, or the investment company that manages your plan (Fidelity, Vanguard, Schwab, etc.). They will provide a loan request form, which asks for the loan amount, the purpose (if your plan distinguishes between primary residence and other uses), and your preferred repayment term. Some plans allow you to request a loan online through the plan's website or mobile app.

The administrator will verify that your plan allows loans, confirm your vested balance and borrowing limit, and calculate your payment amount. Processing typically takes one to two weeks. Once approved, the loan funds are usually deposited into your bank account or a designated investment account. Your repayment schedule begins immediately, and payments are deducted from your paycheck starting with the next pay period.

Frequently Asked Questions

Can I take out a 401(k) loan if I have already taken one?

Yes, but the total of all outstanding loans cannot exceed 50 percent 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 (half of $100,000 is $50,000, minus the $30,000 already borrowed). Some plans limit the number of loans you can have at once, so check your plan rules.

What if I cannot make a loan payment?

A missed payment is typically treated as a default, and the unpaid amount may be declared in default immediately or after a grace period (usually 90 days). Once in default, the loan is treated as a distribution, triggering income tax and potentially a 10 percent early withdrawal penalty. Contact your plan administrator immediately if you miss a payment to understand your plan's default rules and whether a hardship or forbearance option exists.

Do 401(k) loan payments count toward my annual contribution limit?

No. Loan repayments are separate from contributions. You can continue to contribute up to the annual limit (currently $23,500 for those under 50) while repaying a loan. The loan payment is simply a repayment of borrowed money, not a new contribution.

Can I pay off a 401(k) loan early without penalty?

Yes. Most plans allow you to repay the loan in full at any time without penalty. Paying it off early reduces the total interest you pay and gets the borrowed amount back into the market sooner. Check your plan documents to confirm there are no prepayment restrictions.

Is a 401(k) loan better than a hardship withdrawal?

A loan is usually better because it is not taxed at the time you take it and you repay it. A hardship withdrawal is taxed immediately and is permanent—you cannot put the money back. However, hardship withdrawals do not require repayment and do not have the cliff risk if you leave your job. If you are unsure whether you can repay, a hardship withdrawal may be safer despite the immediate tax cost.