Yes, you can borrow from your 401(k), but the rules are strict and the costs to your retirement are real

Most 401(k) plans allow you to borrow against your own balance — the money you and your employer have contributed. You are borrowing from yourself, not from a bank, which is why the interest rate is usually lower than a personal loan. But the IRS sets limits on how much you can take, how long you have to repay it, and what happens if you leave your job before you pay it back.

The loan itself is not taxed when you take it out. You repay it through payroll deductions, and the interest you pay goes back into your own account. That sounds straightforward, but the catch is that the money you borrow stops growing in the market while you are paying it back — and if you cannot repay it, the IRS treats the unpaid balance as a withdrawal, which triggers taxes and penalties.

Key Takeaways

  • You can borrow up to 50 percent of your vested balance, or $50,000, whichever is less, and you have five years to repay it in equal installments.
  • The interest rate is set by your plan administrator and is usually one to two percentage points above the prime rate, but the interest goes back into your account.
  • If you leave your job, you typically have 60 to 90 days to repay the full loan balance or it becomes a taxable withdrawal subject to income tax and a 10 percent early withdrawal penalty if you are under 59½.
  • While you are repaying the loan, that money is not invested in the market, so you miss out on potential growth during the repayment period.
  • Your plan must offer loans as an option — not all 401(k) plans do, so you need to check with your plan administrator first.

How much you can borrow and the repayment timeline

The IRS allows you to borrow the lesser of two amounts: 50 percent of your vested account balance, or $50,000. If your balance is $100,000 and fully vested, you can borrow up to $50,000. If your balance is $60,000, you can borrow up to $30,000 (50 percent). The $50,000 cap is a lifetime limit across all your 401(k) accounts, so if you borrowed $30,000 five years ago and repaid it, you can still only borrow $50,000 total in the future.

You must repay the loan in substantially equal quarterly payments over a period of up to five years. For most loans, this means you will make 20 quarterly payments. Your plan administrator sets the interest rate, which is typically the prime rate plus one to two percentage points — currently somewhere between 7 and 9 percent depending on your plan, though this varies. The interest you pay is credited back to your account, so you are paying yourself.

If you take out a loan to buy a primary residence, some plans allow you to extend the repayment period beyond five years. Check with your plan administrator about whether your plan offers this exception.

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

This is where 401(k) loans become dangerous. When you leave your employer — whether you quit, are laid off, or retire — your loan typically becomes due in full within 60 to 90 days. If you cannot pay it back in that window, the IRS treats the unpaid balance as a distribution from your 401(k).

That distribution is subject to ordinary income tax at your marginal tax rate. If you are under 59½, it is also subject to a 10 percent early withdrawal penalty. So if you borrowed $30,000, left your job, and could not repay it, you might owe $9,000 in taxes and penalties on top of losing the $30,000 from your retirement savings. Some plans allow you to roll the loan into an IRA and continue repaying it, but this is not automatic — you have to ask and your plan has to permit it.

This risk is why borrowing from your 401(k) is most dangerous if you work in an industry with frequent job changes or if you are considering leaving your job soon.

The hidden cost: lost investment growth

Even if you repay the loan on time and never leave your job, you pay a cost that does not show up as a fee. The money you borrowed is no longer invested in the stock market or bond funds in your 401(k). While you are repaying it over five years, that $30,000 is sitting idle, earning only the interest rate your plan charges — typically 7 to 9 percent.

If the stock market averages 10 percent annual returns over those five years, you have given up the difference. Over a 30-year career, borrowing $30,000 for five years can cost you tens of thousands of dollars in forgone growth, because that $30,000 would have compounded for 25 more years after you repaid the loan.

This is especially true if you are young. A 30-year-old who borrows $30,000 and repays it over five years loses not just five years of growth on that money, but 30 years of compounding. A 60-year-old loses only five years. The younger you are, the more expensive a 401(k) loan becomes.

How to request a loan from your plan

Contact your plan administrator — this is usually the HR or benefits department at your company, or a third-party administrator if your company uses one. Ask whether your plan permits loans. Not all plans do. If it does, request a loan process.

You will need to provide basic information: the amount you want to borrow, the reason (though most plans do not restrict the use), and your repayment timeline. The administrator will calculate the maximum you are allowed to borrow based on your vested balance. You will sign loan documents that spell out the interest rate, the repayment schedule, and what happens if you leave your job.

The loan is usually funded within a few business days. Your repayment will be deducted from your paycheck automatically, so you do not have to remember to send a payment.

Alternatives to borrowing from your 401(k)

Before you borrow from your 401(k), consider whether other options exist. A personal loan from a bank or credit union may have a higher interest rate, but you keep your retirement savings intact and you do not risk a tax penalty if you leave your job. A home equity line of credit, if you own a home, often has a lower interest rate than a 401(k) loan and the interest may be tax-deductible.

If you need the money for an emergency, check whether your employer offers a hardship withdrawal. This is different from a loan — you withdraw the money permanently — but some plans allow it without the 10 percent penalty if you meet certain hardship criteria (medical bills, home repairs, education costs). You still owe income tax on the withdrawal, but you avoid the penalty. Hardship withdrawals are not available from all plans, and the rules are strict.

If you are facing a temporary cash shortage, a personal loan or credit card may be cheaper than the long-term retirement cost of a 401(k) loan, especially if you are young.

Tax and penalty rules you need to know

When you take out a 401(k) loan, no tax is due at that moment. You are borrowing your own money. But if the loan is not repaid in full by the due date — either because you left your job and could not pay it back, or because you straightforward stopped making payments — the IRS treats the unpaid balance as a taxable distribution.

You will owe ordinary income tax on the unpaid amount at your marginal tax rate. If you are under 59½, you will also owe a 10 percent early withdrawal penalty on top of the income tax. If you borrowed $30,000 and did not repay $10,000 of it, you would owe income tax plus 10 percent penalty on that $10,000. The tax bill could be $3,000 to $4,000 or more, depending on your tax bracket.

There is one exception: if you leave your job and roll the loan into an IRA within 60 days, you can continue repaying it without triggering the tax and penalty. But this only works if your plan allows it and if you act quickly. Most people do not know about this option, so they end up with an unexpected tax bill.

Frequently Asked Questions

What is the interest rate on a 401(k) loan?

Your plan administrator sets the rate, which is typically the prime rate plus one to two percentage points. As of 2024, this is usually between 7 and 9 percent, but it varies by plan and changes over time. The interest you pay goes back into your own account, not to a bank.

Can I borrow from my 401(k) if I am self-employed?

Only if you have a Solo 401(k) that includes a loan provision. Many Solo 401(k) plans do not allow loans, so you need to check your plan documents. If your plan does allow loans, the same rules explore: you can borrow up to 50 percent of your balance or $50,000, whichever is less.

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 withdrawal and you owe income tax plus a 10 percent penalty if you are under 59½. Some plans allow you to roll the loan into an IRA to keep repaying it, but you must do this within 60 days.

Can I take a 401(k) loan to pay off credit card debt?

Yes, 401(k) plans do not restrict what you use the money for. However, this is usually not a good idea because you are trading high-interest credit card debt for the risk of a tax penalty if you leave your job. A personal loan or balance transfer card may be cheaper in the long run.

Do I have to pay taxes on the interest I pay back into my 401(k)?

No. The interest is credited to your account and grows tax-deferred like the rest of your balance. You only pay taxes when you withdraw money from the 401(k) in retirement.