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

The borrowing limit is half your vested balance, up to $50,000

The IRS sets a hard ceiling on 401(k) loans: you can borrow the lesser of 50% of your vested account balance or $50,000. If your vested balance is $80,000, you can borrow up to $40,000. If it is $120,000, you can still only borrow $50,000. If it is $30,000, you can borrow up to $15,000.

The key word is vested. Your vested balance is the portion of your account that belongs to you outright. Employer matching contributions often vest on a schedule — you might be 0% vested in year one and 100% vested in year five. Your own contributions are always vested immediately. Check your latest plan statement or ask your plan administrator which portion of your balance is vested right now.

Some plans impose their own limits below the IRS maximum. Your employer's plan document may cap loans at 25% of your balance, or allow only one loan at a time, or require a minimum loan amount. Call your plan administrator or log into your plan's website to see what your specific plan allows.

Key Takeaways

• You can borrow up to 50% of your vested 401(k) balance, with a $50,000 ceiling, regardless of your total account size.
• Your plan administrator must approve the loan and set the interest rate, which is typically the prime rate plus 1% to 2%.
• You repay the loan through payroll deductions over a period your plan specifies, usually 2 to 5 years, though some plans allow longer terms for home purchases.
• If you leave your job, most plans require you to repay the loan within 60 to 90 days or the unpaid balance becomes a taxable withdrawal and may trigger a 10% penalty if you are under 59½.
• Borrowed money does not grow in your account while you are repaying it, which means you lose potential investment gains on that portion of your retirement savings.

How the interest rate and repayment term work

Your plan administrator sets the interest rate on your loan. It is typically the prime rate (the rate banks charge their most creditworthy customers) plus 1% to 2%. As of early 2024, the prime rate is around 8.5%, so a 401(k) loan might carry an interest rate between 9.5% and 10.5%, though this varies by plan and market conditions. The interest you pay goes back into your own account, not to a bank or lender.

Repayment terms are set by your plan, but most require repayment over 2 to 5 years through automatic payroll deductions. If you borrow for a home purchase, your plan may allow a longer term — sometimes up to 15 years. You cannot choose a term shorter than what your plan specifies, and you cannot extend it beyond the plan's maximum without taking out a new loan.

Repayment happens through your paycheck, which means the money comes out before taxes. If you borrow $20,000 over 5 years at 9.5%, your monthly payment is roughly $400. That $400 comes from your gross pay, reducing your take-home check.

What happens if you leave your job

This is where 401(k) loans become risky. If you resign, are laid off, or are fired, most plans require you to repay the entire remaining loan balance within 60 to 90 days. If you cannot repay it in that window, the unpaid balance is treated as a taxable withdrawal from your retirement account.

That withdrawal is subject to ordinary income tax at your marginal rate. If you are in the 24% tax bracket and have an unpaid loan balance of $30,000, you owe roughly $7,200 in federal income tax on that amount. If you are under 59½, you also owe a 10% early withdrawal penalty — another $3,000 in this example. Your state may tax it as well.

Some plans offer a grace period or allow you to roll the loan into an IRA or a new employer's plan to avoid this outcome, but this is not automatic. Ask your plan administrator what happens to your loan if you leave, and whether your plan allows a rollover to preserve the loan status.

The hidden cost: lost investment growth

When you borrow $20,000 from your 401(k), that $20,000 stops growing. If your account normally earns 7% annually, you lose roughly $1,400 in gains in year one on that borrowed amount alone. Over a 5-year repayment period, the opportunity cost can easily exceed $5,000 to $8,000 depending on market performance.

You are repaying the loan with after-tax dollars (the money comes from your paycheck after you have already paid income tax on it), but the interest you pay back into your account is not tax-deductible. This is different from a mortgage or student loan, where interest is often deductible. You pay tax on the income, then use that after-tax money to repay a loan whose interest provides no tax benefit.

When a 401(k) loan makes sense

A 401(k) loan is most defensible when you have a short-term cash need and no other source of funds, and when you are confident you will stay in your job long enough to repay it. Common scenarios include a medical emergency, a down payment on a home, or paying off high-interest credit card debt.

The math works better if the interest rate on your 401(k) loan is lower than the rate you would pay elsewhere. If credit card debt costs 18% and a 401(k) loan costs 9.5%, borrowing from your 401(k) saves you money. If you are borrowing at 9.5% to fund a purchase you could make in cash or finance at 4%, the 401(k) loan is more expensive and you lose the growth on the borrowed amount.

A loan also makes sense if you are certain you will not change jobs. If there is any chance you will leave within the repayment period, the risk of being forced to repay the balance in 60 days — and facing a tax bill if you cannot — is substantial.

Alternatives to borrowing from your 401(k)

Before taking a 401(k) loan, consider whether you can use a personal loan from a bank or credit union, borrow from family, or delay the purchase. A personal loan has a fixed rate and term, and you keep your job without affecting the loan. A home equity line of credit (HELOC) or home equity loan may offer a lower rate if you own a home. A credit card cash advance is expensive but does not require you to stay employed.

If you have an emergency fund, using it is often better than borrowing from retirement savings. You can rebuild the emergency fund over time, but you cannot recover the years of lost growth on retirement money once you have withdrawn it.

Some plans offer a hardship withdrawal as an alternative to a loan. A hardship withdrawal lets you take money out without repaying it, but you owe income tax on the full amount and a 10% penalty if you are under 59½. This is usually more expensive than a loan, but it does not require you to repay anything if you leave your job.

How to request a 401(k) loan

Contact your plan administrator — this is usually the HR department, a benefits team, or a third-party administrator whose name appears on your plan statements. Ask for the loan request form and the plan's loan policy. The form will ask how much you want to borrow, what the money is for, and how long you want to repay it (within the plan's limits).

The administrator will calculate your maximum borrowing amount based on your vested balance, verify that the loan amount is within plan limits, and set the interest rate according to the plan's formula. Processing typically takes 5 to 10 business days. Once approved, the money is deposited into your checking account or added to your paycheck as a lump sum.

You will receive loan documents spelling out the interest rate, repayment term, monthly payment amount, and what happens if you leave your job. Read these carefully. Some plans allow you to take out only one loan at a time; others allow multiple loans. Know your plan's rules before you borrow.

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 IRS rules — 50% of your vested balance up to $50,000. However, you cannot borrow from a SEP-IRA or a Solo Roth 401(k) unless your plan document explicitly permits it. Check your plan documents or ask your plan provider whether loans are allowed.

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

The $50,000 limit applies across all your 401(k) accounts combined, not per account. If you have a $100,000 balance in your current employer's plan and a $50,000 balance in an old employer's plan, you can borrow up to $50,000 total, not $50,000 from each. Loans from old plans may have different rules, so contact each plan administrator separately.

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

Yes, most plans allow you to repay early without penalty. Paying early reduces the interest you pay and gets the money back into your account sooner so it can resume growing. There is no tax consequence to early repayment — it is simply a loan being paid off.

Does a 401(k) loan show up on my credit report?

No, a 401(k) loan does not appear on your credit report because it is not a debt owed to a lender. It does not affect your credit score or your ability to borrow from banks. However, if you leave your job and cannot repay the loan, the unpaid balance becomes a taxable withdrawal, which has no credit impact but does have a tax impact.

Can I take a 401(k) loan if I am already retired?

No, you cannot take a new loan from a 401(k) after you have separated from service (retired or left your job). You can only borrow while you are still employed by the company sponsoring the plan. If you already have an outstanding loan when you retire, you must continue repaying it or face a tax bill on the unpaid balance.