Can I Borrow Against My Annuity? Limits, Interest, and Repayment

You can borrow against an annuity that sits inside an employer-sponsored retirement plan, such as a 401(k), 403(b), or 457(b), but you generally cannot borrow against an annuity you bought on your own with after-tax dollars. For the plan-based annuities that do allow it, federal law caps the loan at $50,000 or half your vested balance, whichever is less, and requires you to pay it back within five years. Get the terms wrong and the IRS treats what you borrowed as a taxable distribution, often with a 10% penalty on top.

Which Annuities Allow a Loan

Annuities split into two groups for borrowing purposes. Qualified annuities live inside employer retirement plans, and plans in that category — profit-sharing, money purchase, 401(k), 403(b), and 457(b) — are permitted to offer loans to participants.¹ When the loan meets the federal conditions, the money you receive is not taxed at the time you take it.²

Non-qualified annuities are contracts you buy directly from an insurance company with money you have already paid tax on. These contracts almost never include a loan feature, and if you pledge one as collateral for a bank loan, the IRS treats the pledged amount as a taxable withdrawal rather than a loan.³ If that describes your annuity, skip to the section on non-qualified annuities below.

How Much You Can Borrow

Federal law caps a qualified plan loan at the lesser of two numbers:³

$50,000, reduced by the difference between your highest outstanding loan balance during the previous 12 months and what you owe on the day you take the new loan.
Half of your vested account balance, with a $10,000 floor if the plan chooses to allow it.

Take an example. If your vested balance is $80,000 and you have no other loans out, half your balance is $40,000, which is less than $50,000, so $40,000 is your ceiling.

The Lookback Reduction

The lookback rule stops you from cycling loans up to the cap. Say your highest balance in the past year was $32,000 and you have paid it down to $25,000. The $50,000 cap drops by the $7,000 you have repaid, leaving $43,000. Subtract the $25,000 you still owe, and your new loan cannot exceed $18,000.⁴

Vesting

Only the vested portion of your account counts. Your own contributions and their earnings are always fully vested.⁵ Employer contributions may follow a graded or cliff schedule, and any employer money that has not vested yet is left out of the calculation.

Some plans allow more than one loan at a time. If yours does, the combined balances still have to fit under the same cap.⁴

Interest, Fees, and the Real Cost

ERISA requires the interest rate to be reasonable, meaning comparable to what a commercial lender would charge for a similar loan.⁶ Most plan providers use the prime rate as their benchmark. The interest goes back into your own account, not to a bank, so in a narrow sense you pay yourself. The catch is that the borrowed money is out of the market, so it earns nothing while the loan is outstanding.

Plan administrators often charge a one-time processing fee, commonly $0 to $125; the summary plan description spells out the exact amount. Interest paid on a retirement plan loan is generally not tax-deductible.

How Long You Have to Pay It Back

The loan has to be repaid within five years, with substantially level payments made at least quarterly.³ “Substantially level” means each payment is roughly the same size. You cannot make small payments now and a balloon later. Employer plans usually run repayments through payroll deduction.⁷

Buying a Home

The five-year deadline does not apply if the loan is used to acquire a dwelling unit that will be your principal residence within a reasonable time. Treasury regulations illustrate the exception with a 15-year term.⁸ The level-payment and at-least-quarterly rules still apply. The same tracing rules used for home mortgage interest determine whether the loan actually qualifies.

Spousal Consent

Some plans require your spouse’s written consent for a loan above $5,000. The rule most often applies to plans that offer annuity-form payouts, such as defined benefit and certain money purchase plans. Many 401(k) and profit-sharing plans are exempt from the consent rule if the surviving spouse receives the full death benefit, the plan offers no life annuity option, and no direct transfer came in from a plan that required a survivor annuity.¹ Check what your specific plan requires.

What Happens If You Miss Payments

If you fall behind or fail to repay on schedule, the outstanding balance is treated as a “deemed distribution.”¹ Three things follow:

The full unpaid balance is taxed as ordinary income in the year of the default.
If you are under 59½, an additional 10% early distribution tax may apply.⁹
The plan reports the deemed distribution on Form 1099-R using distribution Code L.¹⁰

A deemed distribution cannot be rolled into an IRA or another retirement plan.¹⁰ If you stay in the plan after defaulting, you still have to keep making the loan payments.

If You Leave Your Job Before the Loan Is Paid Off

Quitting, getting laid off, or retiring with a loan outstanding tightens the timeline sharply. Most plans accelerate repayment, and some give you as little as 90 days to settle the balance.¹¹ If you cannot, the plan reduces your account by the unpaid amount, which the IRS calls a “plan loan offset.”

When the offset happens because you separated from service, and the loan was in good standing at the time, it counts as a “qualified plan loan offset amount.” You then have until the due date of your tax return for that year, including extensions, to roll the offset amount into an IRA or another eligible plan.¹² If the offset does not qualify, for instance because the loan was already in default when you left, the standard 60-day rollover window is all you get. Miss the deadline and the amount is a taxable distribution, with the 10% penalty if you are under 59½.

Higher Limits After a Federally Declared Disaster

Under SECURE 2.0, a plan may raise the loan cap to $100,000 for participants affected by a federally declared disaster and may allow repayments to pause for up to a year.¹³ Plans are not required to adopt these terms, so confirm with your administrator whether they are in place.

If Your Annuity Is Non-Qualified

A non-qualified annuity, bought with after-tax dollars, does not let you take a loan. What most contracts do allow is a partial withdrawal, and the tax treatment is worth understanding before you sign anything.

Earnings Come Out First

The IRS uses an income-first rule. Any money you withdraw is treated as coming from your earnings before it comes from your original investment. Those earnings are taxed as ordinary income. Once you have pulled out all the earnings, further withdrawals come from your basis and are not taxed again.³ If you are under 59½, the taxable portion may also face the 10% early distribution penalty.⁹

Surrender Charges

Most non-qualified contracts impose a surrender charge on withdrawals above a free-withdrawal amount during the early years. Charges commonly run from 0% to 10% and typically decline each year, disappearing after roughly six to ten years. Many contracts let you take out up to 10% of the contract value annually without triggering a surrender charge, but the exact terms vary by insurer. Look at your contract’s surrender schedule before you touch the money.

1
Internal Revenue Service. Retirement Topics – Plan Loans
2
Internal Revenue Service. Hardships, Early Withdrawals and Loans
3
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
4
Internal Revenue Service. Borrowing Limits for Participants with Multiple Plan Loans
5
Internal Revenue Service. Retirement Topics – Vesting
6
eCFR. 29 CFR 2550.408b-1 – General Statutory Exemption for Loans to Plan Participants and Beneficiaries
7
Internal Revenue Service. Plan Loan Failures and Deemed Distributions
8
eCFR. 26 CFR 1.72(p)-1 – Loans Treated as Distributions
9
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
10
Internal Revenue Service. Instructions for Forms 1099-R and 5498
11
Internal Revenue Service. Plan Loan Offsets
12
eCFR. 26 CFR 1.402(c)-2 – Eligible Rollover Distributions
13
Internal Revenue Service. Retirement Plan Distributions After SECURE 2.0