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 take a loan against your account balance. The money you borrow is your own contributions and earnings, not new money from your employer or the plan. You repay the loan through payroll deductions, typically over five years, and you pay interest to your own account. However, not every plan offers this feature, and borrowing has real costs even though you are the lender and the borrower.
The rules for 401(k) loans are set by federal law, but individual plans can be more restrictive. Your plan document determines whether loans are allowed, how much you can borrow, how long you have to repay, and what interest rate applies. Before you borrow, you need to check your specific plan's rules.
Key Takeaways
- You can borrow up to 50 percent of your vested account balance, or $50,000, whichever is less, under federal rules, but your plan may allow less.
- You must repay the loan through payroll deductions, usually within five years, and you pay interest that goes back into your own account.
- If you leave your job, your loan typically becomes due within 60 to 90 days, and unpaid balances are treated as withdrawals subject to income tax and a 10 percent penalty if you are under 59½.
- While you have a loan outstanding, that money does not grow in the market, so you lose potential investment gains on the borrowed amount.
- Your plan administrator or HR department can tell you whether loans are available, what the current interest rate is, and what your maximum borrowing amount would be.
How much you can borrow from a 401(k)
Federal law sets a ceiling: you can borrow up to 50 percent of your vested account balance, or $50,000, whichever is smaller. Vested means the money that legally belongs to you — employer contributions may have a vesting schedule, so not all of your balance may be available to borrow against. If your vested balance is $100,000, you can borrow up to $50,000. If your vested balance is $80,000, you can borrow up to $40,000.
Your plan can set a lower limit. Some plans do not allow loans at all. Others cap loans at a specific dollar amount or a lower percentage of your balance. A few plans allow larger loans if you meet certain conditions. You will find these rules in your plan document, which your HR department or plan administrator can provide.
If you already have an outstanding loan from the same plan, the $50,000 limit applies to your total loans, not each one separately. If you borrowed $30,000 five years ago and still owe $10,000, you can borrow only $40,000 more (assuming your vested balance supports it).
Interest rates and repayment terms
You pay interest on the loan, but the interest goes back into your 401(k) account, not to a bank or lender. The interest rate is set by your plan and is typically the prime rate plus 1 to 2 percentage points. Rates vary by plan and change over time. Your plan administrator can tell you the current rate before you borrow.
You repay the loan through automatic payroll deductions, so the money comes out of your paycheck before taxes. The standard repayment period is five years, but your plan may allow shorter or longer terms. If you borrow for a specific purpose like buying a home, some plans allow longer repayment — up to 15 years — but this is not automatic and depends on your plan's rules.
Your repayment schedule is fixed when you take the loan. If you miss a payment, the unpaid amount is usually treated as a withdrawal, which triggers income tax and potentially a 10 percent early withdrawal penalty if you are under 59½. Missing payments can also put your loan in default, which may require you to repay the entire remaining balance when ready.
What happens to your loan if you leave your job
If you change jobs or are laid off, your 401(k) loan does not disappear. Your former employer's plan typically requires you to repay the full remaining balance within 60 to 90 days. Some plans give you longer, but this is rare and depends on the plan document.
If you cannot repay the loan by the important date, the unpaid balance is treated as a withdrawal from your 401(k). You owe income tax on the full amount, and if you are under 59½, you also owe a 10 percent early withdrawal penalty. This can be a significant tax bill. For example, if you have an outstanding loan balance of $20,000 and you are in the 22 percent tax bracket, you would owe $4,400 in federal income tax plus $2,000 in penalties, for a total of $6,400.
Some people roll their 401(k) into an IRA or a new employer's plan to avoid the when ready repayment important date, but you cannot roll over the loan itself — only the remaining account balance after the loan is deducted. The rules for rollovers are complex and depend on your plan and your new employer's plan, so talk to your plan administrator before you leave your job.
The hidden cost: lost investment growth
When you borrow from your 401(k), the borrowed amount stops growing. If you borrow $20,000 and the stock market returns 7 percent that year, you lose $1,400 in potential gains on that $20,000. Over five years, the lost growth compounds. This is a real cost that does not show up as a fee or interest payment.
The interest you pay back into your account helps offset this loss, but it usually does not fully make up for the market growth you would have earned. The interest rate on a 401(k) loan is typically 4 to 8 percent, while historical stock market returns average around 10 percent. The difference is the opportunity cost of borrowing.
Comparing a 401(k) loan to other borrowing options
A 401(k) loan is not the only way to borrow money. How it compares depends on what you need the money for and what other options are available to you.
| Borrowing Option | Interest Rate Range | Repayment Term | Tax Consequences if Unpaid |
|---|---|---|---|
| 401(k) loan | 4–8 percent (varies by plan) | Usually 5 years; up to 15 for home purchase | Income tax plus 10 percent penalty if under 59½ |
| Personal bank loan | 6–36 percent (varies by credit) | 2–7 years | No tax consequence; default damages credit |
| Home equity line of credit (HELOC) | 7–12 percent (varies by market) | 5–20 years | No tax consequence; home at risk if unpaid |
| Credit card | 18–25 percent (varies by card) | Flexible, but interest accrues quickly | No tax consequence; default damages credit |
A 401(k) loan often has a lower interest rate than a personal loan or credit card, especially if your credit is not excellent. However, it carries a unique risk: if you leave your job, you must repay it quickly or face a large tax bill. A personal loan or HELOC does not have this risk, but the interest rate is usually higher and the interest does not go back into a retirement account.
How to request a 401(k) loan
Contact your plan administrator or HR department and ask whether loans are available under your plan. If they are, ask for the loan process form and the plan's loan rules. You will typically need to provide basic information: how much you want to borrow, what you plan to use it for (some plans ask, though the answer does not usually affect approval), and your preferred repayment term.
The plan administrator will calculate your maximum borrowing amount based on your vested balance and the plan's rules. They will tell you the interest rate, the repayment schedule, and the monthly payment amount. You will sign loan documents that spell out the terms. The process usually takes one to two weeks.
Once approved, the money is deposited into your bank account or added to your paycheck. Repayment begins on the schedule outlined in your loan agreement. You can see your loan balance and remaining payments in your 401(k) account statements.
Frequently Asked Questions
Can I borrow from my 401(k) if I am self-employed?
If you have a Solo 401(k) or a self-employed 401(k), you can borrow from it under the same rules as a traditional 401(k). However, if you are the only employee, you cannot borrow from a SEP-IRA or a Solo Roth IRA — those plans do not allow loans. Check your specific plan document to confirm.
What happens if I pay back my 401(k) loan early?
You can repay a 401(k) loan early without penalty. The interest you have already paid stays in your account. Paying early stops the interest from accruing further and returns the borrowed amount to the market sooner, so you regain the potential for investment growth.
Can I borrow from my 401(k) while I am still working?
Yes. You can borrow from your 401(k) while employed and still contributing to the plan. However, some plans suspend contributions while you have an outstanding loan, so check your plan rules. You will continue to repay the loan through payroll deductions.
Is a 401(k) loan the same as an early withdrawal?
No. A loan is money you repay; a withdrawal is money you keep. Withdrawals before age 59½ are subject to income tax and a 10 percent penalty (with some exceptions). A loan has no when ready tax consequence as long as you repay it on schedule. However, if you default on the loan, it becomes a withdrawal and triggers taxes and penalties.
Can I borrow from my 401(k) to pay off credit card debt?
Yes, you can borrow for any reason, though some plans ask what the money is for. A 401(k) loan typically has a lower interest rate than credit card debt, so it can reduce the total interest you pay. However, you lose investment growth on the borrowed amount, and if you leave your job, you must repay the loan quickly or face a large tax bill. Consider whether the lower interest rate outweighs these costs in your situation.