Yes, you can borrow from your 401k if your employer’s plan offers loans, and federal law lets you take out up to $50,000 or half your vested balance, whichever is less. You repay through payroll deductions over five years at an interest rate set by the plan, and the money you pay in interest goes back into your own account. The catch is what happens if things don’t go to plan: miss payments or leave your job, and the outstanding balance can become taxable income with a 10% penalty on top.
Does Your Plan Even Allow Loans
Federal law permits 401k loans but does not require employers to offer them.1Internal Revenue Service. Retirement Topics – Loans Whether you have this option is a plan-by-plan question. The Summary Plan Description, available from your plan administrator or HR, tells you.
Plans that do allow loans often add restrictions tighter than the IRS ceiling. A common minimum loan is $1,000, some plans allow only one loan at a time, and some restrict loans to specific purposes like a home purchase or medical costs while others treat them as general-purpose. If your plan caps loans at $25,000 even though the statute allows $50,000, the lower plan cap wins.
How Much You Can Borrow
The IRS ceiling is the lesser of $50,000 or half your vested account balance.2Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Your vested balance is what you own outright; employer contributions still on a vesting schedule don’t count. So a $120,000 vested balance means a $50,000 cap (not $60,000), and a $40,000 vested balance means a $20,000 cap.
There is also a floor. You can borrow up to $10,000 even when that exceeds half your vested balance.2Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts With a $15,000 vested balance, half is $7,500, but the statute still permits up to $10,000. Your plan can decline to use the floor, so check the plan document.
One rule catches people by surprise: the $50,000 cap is reduced by your highest outstanding loan balance from the plan in the previous 12 months.2Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts If you borrowed $30,000 last year and paid it down to $10,000, your new maximum is $20,000, not $40,000. This prevents cycling repeatedly through the full limit.
If you participate in more than one retirement plan from the same employer, or from employers under common ownership or in an affiliated service group, the $50,000 limit applies across all of them combined.3Internal Revenue Service. Issue Snapshot – Borrowing Limits for Participants With Multiple Plan Loans A $20,000 outstanding loan in one plan leaves $30,000 available across all plans of the same employer group.
Interest, Fees, and the Tax on Interest
Every 401k loan charges interest, and unlike a bank loan the interest goes back into your own account. Federal rules require the rate to be comparable to what a commercial lender would charge for a similar loan. Most plans set it at prime plus one or two percentage points; the exact figure is in your Summary Plan Description or on the loan application.
Many plans also charge a one-time origination or processing fee, often around $50 to $100, either taken from the loan proceeds or billed to your account.
Interest on a 401k loan is generally not tax-deductible, even when the loan funds a home purchase. And because you repay with after-tax dollars, the interest portion is effectively taxed twice: once when you earn the wages you use to make the payment, and again when you draw the money out in retirement. The principal side is a wash, but the interest is a genuine added cost.
Repayment: Five Years, Quarterly, Payroll
Federal law requires repayment within five years.4Internal Revenue Service. Retirement Plans FAQs Regarding Loans Payments must be substantially equal, include both principal and interest, and occur at least quarterly.2Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Most employers automate this through payroll deductions.
The one statutory exception is a loan used to buy your primary residence. Home-purchase loans are exempt from the five-year rule, with no specific maximum term set by law.1Internal Revenue Service. Retirement Topics – Loans Your plan document sets the actual term. Ten, 15, or even 20 years are common. The plan administrator will require documentation confirming the purchase before approving the longer term.5Internal Revenue Service. It’s Up to Plan Sponsors to Track Loans, Hardship Distributions
What Happens If You Miss a Payment
One missed payment doesn’t automatically create a tax bill. Many plans include a cure period, a window to catch up before the IRS treats the loan as distributed.6Internal Revenue Service. Issue Snapshot – Plan Loan Cure Period When a plan offers one, the cure period can run through the end of the calendar quarter after the quarter the payment was due. Miss a February payment and you have until June 30 to make it good.
Fail to cure, and the entire outstanding balance including accrued interest becomes a deemed distribution.7Internal Revenue Service. Deemed Distributions – Participant Loans The full remaining amount is taxable income for the year. If you are under 59½, add a 10% early distribution penalty. Plans are not required to offer a cure period, so some treat a single missed payment as immediate default. Read the plan document.
Leaving Your Job While the Loan Is Outstanding
This is the biggest risk of borrowing from your 401k. When you separate from your employer, whether you quit, are laid off, or retire, the plan can demand the full remaining balance.1Internal Revenue Service. Retirement Topics – Loans Deadlines vary; some plans allow only a few weeks, others several months. If you can’t pay in time, the balance becomes a plan loan offset, which is treated as a distribution.
The Tax Cuts and Jobs Act of 2017 softened this. When the offset happens because you left your job (a “qualified plan loan offset”), you have until your federal tax filing deadline for that year, including extensions, to roll the amount into an IRA or another eligible plan.8Internal Revenue Service. Plan Loan Offsets With a six-month extension, the deadline can reach October 15 of the following year. Complete the rollover and you avoid both the income tax and the 10% penalty.
Spousal Consent
Most 401k plans are profit-sharing plans and are generally not subject to the federal spousal consent rules that apply to defined benefit, money purchase, and target benefit plans.9Internal Revenue Service. Fixing Common Plan Mistakes – Failure to Obtain Spousal Consent10Internal Revenue Service. Retirement Topics – Qualified Joint and Survivor Annuity Even so, some 401k plans voluntarily require a spouse’s signed and notarized authorization for loans. Your Summary Plan Description will say.
Disaster Relief and Military Service
Two situations open special rules.
The SECURE 2.0 Act of 2022 lets plans raise the loan cap to $100,000 (or your full vested balance, whichever is less) for participants affected by federally declared disasters. Plans can also suspend repayments for up to a year, covering payments due from the start of the incident period through 180 days after it ends. The remaining schedule is recalculated to reflect the delay and accrued interest.11Internal Revenue Service. Disaster Relief – Retirement Plans and IRAs Under the SECURE 2.0 Act of 2022 Both provisions are optional for employers.
For active military duty, the Uniformed Services Employment and Reemployment Rights Act allows the plan to suspend loan repayments for the length of your service if you provide your orders. Interest during the suspension is capped at 6% if you request the reduction. When you return, payments resume at the original frequency and amount, and the deadline is pushed out by the length of your service.12Internal Revenue Service. Retirement Plans FAQs Regarding USERRA and SSCRA
The Cost You Don’t See on the Statement
A 401k loan has no credit check and no application to an outside lender, and the interest goes back into your account. It looks cheap. The real cost is what the borrowed money stops doing: it isn’t invested anymore, so it isn’t earning market returns. Repayments trickle back in, but they miss the compounding they would have had if the balance had stayed put. Over a multi-year loan, that lost growth can meaningfully shrink your balance at retirement.
Ask whether your plan lets you keep contributing while you repay. Some plans suspend new contributions until the loan is paid off, which means missing both investment growth and any employer match during that stretch. Even when contributions are allowed, the combined bite of loan repayments and ongoing contributions can push borrowers to reduce contributions voluntarily, producing the same long-term shortfall.