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

The borrowing limit: up to 50% of your vested balance, capped at $69,000

Most 401(k) plans let you borrow up to 50% of your vested account balance, with a maximum of $69,000 (as of 2024). The $69,000 cap is set by the IRS and does not change year to year based on inflation, though it can be adjusted by Congress. If your vested balance is $100,000, you can borrow up to $50,000. If it is $30,000, you can borrow up to $15,000.

The vested balance is the money that legally belongs to you right now — not the portion your employer is still holding until you meet certain conditions. If your plan has a vesting schedule, your plan administrator can tell you exactly what portion is vested today. Employer matching contributions often vest on a different schedule than your own contributions, so the two may not be vested at the same time.

Some plans are more restrictive than the IRS allows. Your employer can set a lower limit — for example, 25% of your balance instead of 50%, or a maximum of $30,000 instead of $69,000. Check your plan's summary plan description (SPD) or ask your plan administrator what your specific plan permits.

Key Takeaways

• You can borrow up to 50% of your vested 401(k) balance, with a $69,000 maximum, but your employer's plan may set a lower limit.
• You must repay the loan through payroll deductions within five years for general loans, or within the life of the mortgage for home loans.
• 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.
• Borrowed money stops earning investment returns while it sits in the loan account, which can cost you significantly over time.
• Interest rates on 401(k) loans are typically prime rate plus 1%, set by your plan administrator, and that interest goes back into your own account.

How repayment works and what happens if you leave your job

You repay a 401(k) loan through automatic payroll deductions, usually over five years for a general loan. The IRS sets this five-year term as the standard; your plan cannot require you to repay faster. However, if you borrow money to buy a primary residence, some plans allow a longer repayment period — often 10 to 30 years — though this is optional for the plan to offer.

The repayment schedule is set when you take the loan. If you borrow $20,000 at 7% interest over five years, your paycheck will be reduced by roughly $400 per month for 60 months. That amount is deducted before taxes, which means you do not pay income tax on the money going back into your own account.

If you leave your job — whether you resign, are laid off, or retire — the loan becomes due immediately. Most plans give you 60 to 90 days to repay the full remaining balance. If you do not repay it within that window, the IRS treats the unpaid amount as a distribution. You owe income tax on it at your ordinary tax rate, plus a 10% early withdrawal penalty if you are under 59½. On a $15,000 unpaid balance, that penalty alone is $1,500, plus whatever your income tax bracket adds.

Some plans allow a "loan offset" — they simply take the unpaid balance from your remaining 401(k) funds to settle the debt. This avoids the penalty but still triggers income tax on the offset amount. Either way, leaving your job with an outstanding loan is expensive.

The real cost: lost investment growth

The money you borrow stops earning returns in your 401(k) investments. If you borrow $30,000 and the stock market returns 8% that year, you lose $2,400 in potential growth on that $30,000. Over five years, that loss compounds — the money you could have earned on your earnings is also gone.

The interest you pay on the loan goes back into your account, but it is typically lower than what your investments would have earned. If your plan charges 7% interest and your portfolio would have returned 9%, you are behind by 2% per year on the borrowed amount. Over a five-year loan, that gap adds up to real money.

This opportunity cost is invisible — you do not see a bill for it — but it is the largest expense of borrowing from your 401(k). A financial calculator can show you the difference between borrowing and leaving the money invested, using your plan's interest rate and your expected investment return.

Interest rates and who sets them

Your plan administrator sets the interest rate on 401(k) loans, within IRS guidelines. Most plans use the prime rate (the rate banks charge their most creditworthy customers) plus 1 or 2 percentage points. When the prime rate is 8.5%, a plan charging prime plus 1% would charge 9.5%.

The interest rate is fixed for the life of the loan — it does not change if the prime rate moves. The interest you pay goes directly back into your 401(k) account, not to a bank or lender. This is different from a personal loan, where interest goes to the lender as profit.

You do not need a credit check to borrow from your 401(k), and the plan cannot deny you a loan based on your credit score or income. If you meet the plan's borrowing rules, you can borrow. This is one reason people consider 401(k) loans when they cannot get a personal loan elsewhere.

Loans versus hardship withdrawals: when each makes sense

A 401(k) loan is different from a hardship withdrawal. A loan must be repaid; a withdrawal is permanent. With a loan, you keep the money invested and working toward retirement. With a withdrawal, that money is gone, and you owe income tax plus a 10% penalty if you are under 59½.

A hardship withdrawal is only available for specific situations — medical bills, home purchase, education, or preventing eviction, depending on your plan. A 401(k) loan has no stated purpose; you can borrow for any reason. However, a loan requires you to repay it on schedule, while a withdrawal does not.

If you need money short-term and can repay it within five years, a loan preserves your retirement savings and lets the borrowed portion keep growing. If you need money permanently and cannot repay it, a withdrawal may be the only option — but the tax and penalty cost is steep. Some people use a loan first, then take a withdrawal only if the loan repayment becomes impossible.

Loans from multiple plans and the $69,000 aggregate limit

If you have 401(k) accounts at more than one employer, you can borrow from each plan separately. However, the IRS applies the $69,000 limit to all your 401(k) loans combined, not per plan. If you borrow $40,000 from your current employer's plan and $35,000 from a previous employer's plan, you have exceeded the $69,000 cap by $6,000.

The excess amount is treated as a taxable distribution, subject to income tax and the 10% early withdrawal penalty if you are under 59½. This rule catches people by surprise, especially those who have worked at multiple companies and kept old 401(k) accounts open.

Before borrowing from a second plan, add up all outstanding 401(k) loans across every plan you have. Your plan administrator can tell you the current balance on your loan, but you are responsible for tracking loans at other employers.

What to know before you borrow

Borrowing from your 401(k) should be a last resort, not a first option. The five-year repayment term is short, which means high monthly payments. If your income drops or you lose your job, you may not be able to keep up the payments — and the consequences are severe.

If you leave your job with an outstanding loan, you have a narrow window (usually 60 to 90 days) to repay the full balance or face taxes and penalties. This is especially risky if you are job-hunting or between jobs. Some people have been forced to take a hardship withdrawal or borrow from family just to settle a 401(k) loan after leaving employment.

Before borrowing, explore other options: a personal loan from a bank or credit union, a home equity line of credit if you own a home, or a payment plan with the creditor you owe money to. These alternatives may have lower interest rates or longer repayment terms, and they do not put your retirement savings at risk.

Frequently Asked Questions

Can I borrow from my 401(k) if I am still working at the company?

Yes. Most plans allow loans while you are employed. However, some plans restrict loans to money you have contributed yourself, excluding employer matching contributions. Check your plan's summary plan description or ask your administrator what portions of your balance are available to borrow against.

What happens to my loan if I get laid off?

The loan becomes due in full, usually within 60 to 90 days. If you cannot repay it, the unpaid balance is treated as a taxable distribution, subject to income tax and a 10% penalty if you are under 59½. Some plans allow you to continue making payments after you leave, but this is optional — most require immediate repayment.

Can I take out a second loan if I still owe on the first one?

Yes, as long as the total of all your 401(k) loans does not exceed 50% of your vested balance or $69,000. However, taking multiple loans shortens the repayment window for each one and increases your monthly payment obligations. Most people find one loan is already difficult to manage.

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

No. A 401(k) loan does not appear on your credit report because it is not a debt to an outside lender. However, if you default on the loan after leaving your job and the unpaid balance is offset against your account, that does not hurt your credit either — it is an internal transaction within your retirement plan.

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

Yes. Most plans allow you to repay the loan in full at any time without penalty. Paying it back early stops the interest from accruing and gets the money back into your investments sooner. However, check your plan documents to confirm — some plans may have restrictions, though this is rare.