How to Borrow Money From Your 401(k)

You can borrow from your 401(k) while you're still working, but the loan comes from your own money and you have to pay it back with interest

A 401(k) loan lets you borrow against the balance you've already built up in your retirement account. Your employer's plan administrator handles the loan, not a bank. You borrow your own money, not new money from the plan, and you repay it through payroll deductions. The interest you pay goes back into your account, not to a lender.

Not all 401(k) plans allow loans — your employer decides whether to offer this feature. If your plan does allow loans, there are strict rules about how much you can borrow, how long you have to repay it, and what happens if you leave your job before the loan is paid off.

Key Takeaways

• You can borrow up to 50 percent of your vested 401(k) balance, or $50,000, whichever is less, though your plan may set a lower limit.
• You must repay the loan within five years in most cases, with payments deducted from your paycheck along with interest.
• If you leave your job, you typically have to repay the full remaining balance within 60 to 90 days or face taxes and penalties on the unpaid amount.
• Borrowing from your 401(k) reduces the money growing for retirement and puts your job security at financial risk if you cannot repay.
• Your plan administrator sets the interest rate, which is usually prime rate plus 1 or 2 percent, and that interest goes back into your account.

How much you can borrow

The federal limit is 50 percent of your vested account balance, up to a maximum of $50,000. If your balance is $100,000, you can borrow up to $50,000. If your balance is $60,000, you can borrow up to $30,000. Your employer's plan may set a lower limit, so check your plan documents or call your plan administrator to find out what your specific plan allows.

The amount you can borrow also depends on what you've already borrowed. If you took out a $20,000 loan two years ago and still owe $15,000, that $15,000 counts against your borrowing limit. You could not borrow another $50,000 — you could borrow only up to the difference between your limit and what you still owe.

The repayment timeline and interest rate

Most 401(k) loans must be repaid within five years. Your employer sets the interest rate, which is typically the prime rate plus 1 or 2 percent. Unlike a bank loan, the interest you pay goes back into your own 401(k) account, not to an outside lender. Your payments are deducted from your paycheck automatically, so the repayment happens before you see the money.

If you borrow for a specific purpose like a home purchase, some plans allow a longer repayment period — up to 15 years or more. Ask your plan administrator what terms your plan offers. The longer the repayment period, the lower your monthly payment, but you pay more interest overall.

What happens if you leave your job

If you quit, are laid off, or are fired while you have an outstanding 401(k) loan, you face a critical decision. Most plans require you to repay the full remaining balance within 60 to 90 days. If you do not repay it in that window, the unpaid amount is treated as a withdrawal from your 401(k).

That withdrawal triggers two consequences: you owe income tax on the amount, and if you are under 59½, you also owe a 10 percent early withdrawal penalty. On a $30,000 unpaid loan balance, you could owe $9,000 or more in taxes and penalties combined, depending on your tax bracket. Some plans allow you to roll the loan into an IRA or a new employer's plan to extend the repayment important date, but this is not automatic — you have to request it and meet specific conditions.

The risks of borrowing from your 401(k)

When you borrow from your 401(k), the money you borrow stops growing. If you borrow $30,000 and the market returns 7 percent that year, you lose $2,100 in growth on that $30,000. Over the five-year repayment period, that lost growth compounds. You are essentially betting that you need the money now more than you need the retirement security that money would have provided.

The bigger risk is job loss. If you lose your job and cannot repay the loan quickly, you face a tax bill you may not be able to pay. This is why borrowing from your 401(k) is riskier than taking out a personal loan or line of credit — those do not disappear if you change jobs, and they do not trigger a tax penalty if you cannot repay them when ready.

How to request a 401(k) loan

Contact your plan administrator — this is usually your employer's benefits department or the company that manages your 401(k) plan. Ask for a loan request form. You will need to provide basic information: how much you want to borrow, what you are borrowing for (though the plan cannot deny you based on the reason), and your repayment preference.

The plan administrator will calculate how much you are allowed to borrow based on your vested balance and any existing loans. Once you submit the form, approval typically takes one to two weeks. The money is usually deposited into your bank account or issued as a check. Your first repayment is deducted from your next paycheck, and the schedule continues until the loan is paid off.

Alternatives to borrowing from your 401(k)

Before you borrow from your 401(k), consider other options. A personal loan from a bank or credit union does not reduce your retirement savings and does not create a tax risk if you lose your job. A home equity line of credit or home equity loan offers lower interest rates if you own a home. A 0 percent credit card offer can work for short-term needs if you can pay off the balance before the promotional period ends.

If you are facing a financial emergency, look into whether you can reduce expenses, pick up extra income, or borrow from family first. Each of these options preserves your retirement savings and avoids the tax consequences of a 401(k) loan default.

Frequently Asked Questions

Can I borrow from my 401(k) if I am no longer working there?

No. You can borrow from your 401(k) only while you are employed by the company that sponsors the plan. Once you leave the job, you cannot take out a new loan. If you already have an outstanding loan when you leave, you must repay it according to the terms described in your plan documents, usually within 60 to 90 days.

Do I have to pay taxes on a 401(k) loan?

No, not while you are repaying it. The loan itself is not taxable income. You pay interest on the loan, but that interest goes back into your account and is not a tax-deductible expense. You owe taxes only if you fail to repay the loan and it is treated as a withdrawal.

What if I cannot repay my 401(k) loan before I leave my job?

You have 60 to 90 days after you leave to repay the balance in full. If you do not, the unpaid amount becomes a taxable withdrawal. You will owe income tax on it, plus a 10 percent early withdrawal penalty if you are under 59½. Some plans allow you to roll the loan into an IRA to extend the important date, but you must request this before the important date passes.

Can I borrow from my 401(k) more than once?

Yes, if your plan allows it. However, the total amount you borrow across all loans cannot exceed 50 percent of your vested balance or $50,000. If you repay one loan, you can borrow again up to your limit. Some plans limit you to one loan at a time, so check your plan rules.

Is the interest rate on a 401(k) loan fixed or variable?

Most plans set a fixed interest rate based on the prime rate at the time you take out the loan. The rate stays the same for the life of the loan. Your plan administrator determines the exact rate, so ask what rate applies to new loans before you borrow.