Max Loan From a 401(k): Limits, Repayment, and Job Loss

The maximum loan from a 401(k) is $50,000 or half your vested account balance, whichever is less. That’s the federal ceiling, but the amount actually available to you is often smaller because a lookback rule subtracts your recent loan activity, and your employer’s plan can set stricter limits than the tax code allows. Some plans don’t offer loans at all.

The Two Federal Ceilings

Federal tax law imposes two limits, and you’re bound by the smaller of the two. The first is a flat $50,000 cap. No matter how large your account, you cannot borrow more than $50,000 from a single employer’s plans. The second is tied to your vested balance: you can borrow up to half of it.¹

Your vested balance includes what you contributed, any rollover money, and the portion of employer contributions you would keep if you left the job today. Unvested match or profit-sharing money doesn’t count.

Two quick illustrations. If your vested balance is $150,000, half is $75,000, but the $50,000 cap controls. If your vested balance is $60,000, half is $30,000, and that smaller figure controls. Call this your starting maximum, because another rule usually trims it.

How Prior Loans Shrink Your Available Amount

The $50,000 cap is not automatically available. The tax code reduces it based on your borrowing history over the previous twelve months. The reduction equals your highest outstanding loan balance during the one-year period ending the day before your new loan, minus whatever balance you currently owe on the date the new loan is made.²

In formula form: $50,000 minus (highest balance in the past year minus current balance) equals your adjusted cap. Compare that adjusted cap to 50% of your vested balance and take the smaller number.

If You Already Paid Off a Prior Loan

Say your vested balance is $120,000 and you paid off a $20,000 loan two months ago. Your current balance is $0. Your highest balance in the past year was $20,000. The reduction is $20,000. Your adjusted cap is $50,000 minus $20,000, or $30,000. Half your vested balance is $60,000, so the smaller figure, $30,000, is the most you can borrow right now.³

If a Prior Loan Is Still Outstanding

Now suppose you still owe $15,000 on an existing loan and your highest balance over the past year was $20,000. The reduction is $5,000. Your adjusted cap is $45,000. But your total outstanding loans, existing plus new, must stay under that adjusted cap, so the most you could borrow on a new loan is $30,000. If half your vested balance is lower than $30,000, that smaller number controls.³

This is the piece most people miss. Any loan activity in the past twelve months almost certainly means the amount available to you is less than the raw $50,000 or 50% figure.

The $10,000 Floor for Small Balances

There’s a lesser-known exception. The tax code says the vested-balance limit is the greater of half your vested balance or $10,000.¹ If your vested balance is $15,000, half is $7,500, but the floor could let you borrow up to $10,000. Plans are not required to include this exception, so check your plan document before assuming it applies.⁴

Your Plan Can Be Stricter

The federal figures are ceilings, not entitlements. Your employer’s plan document can cap loans at a lower dollar amount or a smaller percentage. Some plans allow only one outstanding loan at a time; others permit multiple as long as the combined total stays within the statutory ceiling.³ A meaningful number of plans don’t offer participant loans at all. Your Summary Plan Description spells out what’s actually available.⁴

If you participate in more than one plan maintained by the same employer or a related company in the same controlled group, the $50,000 cap applies across all of those plans combined.³ Borrowing $40,000 from one and $30,000 from another would put you over even though each loan is under $50,000 on its own.

Repayment Rules That Keep the Loan Tax-Free

Getting the amount right is only part of it. The repayment structure has to satisfy IRS rules too, or the outstanding balance gets treated as a taxable payout.

The Five-Year Rule

You must repay the loan within five years, with payments made at least quarterly in roughly equal installments covering both principal and interest.² Most employers deduct payments straight from your paycheck. Balloon or lump-sum repayment at the end of the term isn’t allowed; payments have to stay level throughout the life of the loan.⁵

Longer Term for a Primary Home Purchase

Loans used to buy your primary residence can run longer. The tax code says only that the term must be “reasonable,” and plan documents commonly allow 10 to 30 years for these loans.⁵ The money must go toward buying the home you’ll actually live in. Refinancing an existing mortgage or purchasing a vacation property doesn’t qualify.

The Cure Period for a Missed Payment

A missed payment doesn’t trigger an immediate default. You generally have until the end of the calendar quarter following the quarter in which the payment was due. Miss a July payment, and you have until December 31 to catch up. Fail to do so, and the remaining balance is treated as a taxable distribution.⁴

What Happens If You Leave the Job

Separation is where most people run into trouble. Payroll deductions stop, and you need another way to keep the loan current. Some plans let you keep paying directly for the rest of the original term. Others require full repayment within a short window after your last day. Your plan document controls.

If you can’t repay, the plan reduces your account balance by the outstanding loan amount. This is called a plan loan offset, and the IRS treats it as an actual distribution, not a deemed distribution. The distinction matters for one reason: a plan loan offset is eligible for rollover, while a deemed distribution is not.⁶

Before 2018, you had 60 days to roll the offset amount into an IRA or another employer plan. The Tax Cuts and Jobs Act extended that. For qualified plan loan offset amounts, you now have until the due date of your tax return, including extensions, for the year the offset occurs.⁷ Leave your job in March 2026 with a $25,000 balance that gets offset, and you generally have until April 15, 2027, or October 15, 2027 with an extension, to deposit that $25,000 into an IRA and avoid tax.

The Tax Hit If Something Goes Wrong

When a 401(k) loan fails the rules on amount, schedule, or timing, the IRS treats the outstanding balance as a “deemed distribution.” The loan may still exist on the plan’s books, but for tax purposes you’re treated as having received cash.⁵

That amount is added to your taxable income for the year of the failure. A $40,000 default lands on your return as $40,000 in ordinary income, potentially pushing you into a higher bracket. And unlike a plan loan offset, a deemed distribution cannot be rolled over into another retirement account to escape the tax.⁶

If you’re under 59½ when the deemed distribution occurs, you also owe a 10% early distribution penalty on top of the income tax.⁸ On that $40,000 default, the penalty alone is $4,000, and federal income tax can easily add $8,000 to $12,000 depending on your bracket. Running the math carefully before you borrow is worth the time.

1
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
2
Internal Revenue Service. Retirement Plans FAQs Regarding Loans
3
Internal Revenue Service. Issue Snapshot – Borrowing Limits for Participants With Multiple Plan Loans
4
Internal Revenue Service. Retirement Topics – Plan Loans
5
Internal Revenue Service. Deemed Distributions – Participant Loans
6
eCFR. 26 CFR 1.402(c)-2 – Eligible Rollover Distributions
7
Federal Register. Rollover Rules for Qualified Plan Loan Offset Amounts
8
Internal Revenue Service. Topic No. 558, Additional Tax on Early Distributions From Retirement Plans Other Than IRAs