How to Borrow Money From Your 401(k)

You can borrow from your own 401(k) balance, but the loan comes with strict rules and real costs

A 401(k) loan lets you borrow money from your own retirement savings and pay it back to yourself over time. The loan comes from your vested balance — the money that legally belongs to you right now — and you repay it through payroll deductions. Unlike a withdrawal, a loan does not trigger income tax or the 10% early withdrawal penalty, as long as you follow the rules. But borrowing from your retirement account means less money growing for your future, and if you leave your job, the loan typically must be repaid quickly or it becomes a taxable withdrawal.

The mechanics are straightforward: you request a loan through your plan administrator, they verify your balance and calculate your payment, and the money goes into your bank account within one to two weeks. You then repay through automatic payroll deductions, usually over five years. The catch is that leaving your job can force you to repay the entire balance within 60 to 90 days, and missing that important date turns the unpaid amount into a taxable withdrawal with penalties.

Key Takeaways

• You can borrow up to 50% of your vested 401(k) balance, or $50,000, whichever is less, and most plans allow loans but some do not.
• The loan is repaid through automatic payroll deductions, usually over five years, at an interest rate set by your plan administrator that typically ranges from 8% to 10%.
• 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 potentially the 10% penalty.
• Borrowing stops your contributions from growing and reduces the balance earning investment returns, which costs you money over time even though you pay interest back to yourself.
• Your plan documents set the exact rules — some plans do not allow loans at all, and others have different terms, so you must check with your plan administrator first.

How much you can borrow and what the limits are

The IRS sets a ceiling: you can borrow up to 50% of your vested account balance, or $50,000, whichever is smaller. If your vested balance is $100,000, you can borrow up to $50,000. If it is $60,000, you can borrow up to $30,000. The $50,000 cap is a lifetime limit, meaning if you borrowed $30,000 five years ago and repaid it, you still cannot borrow more than $20,000 in a new loan.

Your plan administrator may set stricter limits. Some plans allow only one loan at a time; others allow two. Some plans do not allow loans at all — you have to check your plan documents or call your plan administrator to know what your specific plan permits. The vested balance is the key number: you cannot borrow against money that is not yet yours. If your employer matches contributions but those matches do not vest for three years, you cannot borrow against them until they vest.

The interest rate and repayment schedule

Your plan administrator sets the interest rate, which is typically the prime rate plus 1% to 2%. As of early 2024, that usually falls between 8% and 10%, though rates vary by plan and change over time. You pay this interest back to your own 401(k) account, not to a bank, so the interest goes back into your retirement savings. However, you are paying interest on money that was already yours, which is a real cost.

Repayment happens through payroll deductions, usually over five years. If you borrow $20,000 at 9% interest over five years, your monthly payment is roughly $475. The exact payment depends on your plan's terms. Some plans allow longer repayment periods for larger loans or shorter periods for smaller ones — again, your plan documents control this. You cannot skip payments; they come out of your paycheck automatically, just like a 401(k) contribution.

What happens if you leave your job

This is the biggest trap. If you leave your employer — whether you quit, are laid off, or retire — your loan typically becomes due in full within 60 to 90 days. Your plan documents specify the exact important date. If you do not repay the full balance by that date, the IRS treats the unpaid amount as a withdrawal from your 401(k).

That withdrawal is subject to income tax at your ordinary tax rate, plus the 10% early withdrawal penalty if you are under 59½. If you borrowed $30,000 and cannot repay it when you leave, and you are in the 22% tax bracket, you owe roughly $9,900 in taxes and penalties on top of losing the $30,000 from your retirement account. Some plans allow you to roll the loan into an IRA or a new employer's plan to avoid this, but you have to act within the important date — it does not happen automatically.

The hidden cost: lost growth on borrowed money

When you borrow $30,000 from your 401(k), that $30,000 stops earning investment returns. If your account normally grows at 7% per year, that borrowed money is no longer growing at 7%. You are paying interest back into the account, but that interest rate (usually 8% to 10%) is fixed and does not change, while your other investments may grow faster or slower depending on the market.

Over a five-year loan, this opportunity cost adds up. If you borrowed $30,000 and your account would have grown at 7% annually, you lose roughly $5,600 in growth that you will never get back. You pay interest to yourself, but you also lose the compounding effect of that money growing for the next 30 years until retirement. This is why a 401(k) loan is most sensible for a short-term, urgent need rather than a long-term expense.

How to request a loan from your plan

Contact your plan administrator — this is usually the company that manages your 401(k), not your employer's HR department directly. They may be Fidelity, Vanguard, Schwab, or another financial services company. Your plan documents or your latest 401(k) statement will show the administrator's name and contact information.

The administrator will ask you to complete a loan request form, which includes the amount you want to borrow and the repayment term you prefer (within the limits your plan allows). You will need to provide your Social Security number and account information. The administrator will verify your vested balance, confirm you have not exceeded the borrowing limits, and calculate your monthly payment. The whole process usually takes one to two weeks. Once approved, the money is deposited into a checking account you specify, and your repayment schedule begins.

Alternatives to borrowing from your 401(k)

Before you borrow, consider whether another option makes more sense. A personal loan from a bank or credit union may have a lower interest rate and does not put your retirement savings at risk. A home equity line of credit, if you own a home, often has a lower rate than a 401(k) loan. A credit card is expensive but does not require you to repay it within 60 days if you change jobs.

If you are facing a true hardship — medical bills, foreclosure, eviction — some plans allow a hardship withdrawal instead of a loan. A hardship withdrawal lets you take money out without repaying it, but you pay income tax and the 10% penalty on the full amount. This is worse than a loan in most cases, but it may be your only option if your plan does not allow loans or you have already borrowed the maximum.

Frequently Asked Questions

Can I borrow from my 401(k) if I am still working?

Yes. As long as your plan allows loans and you have a vested balance, you can borrow while employed. The loan is repaid through payroll deductions, so your employer processes the payments automatically. You do not have to repay the full balance when ready as long as you stay employed and make your monthly payments on time.

What happens if I cannot make a loan payment?

Missing a payment is treated as a default. Your plan may allow a short grace period (usually 30 days), but after that the unpaid balance becomes a taxable withdrawal. You owe income tax and potentially the 10% penalty on the full defaulted amount. Contact your plan administrator when ready if you think you will miss a payment — some plans have hardship provisions or allow you to extend the repayment period.

Can I pay back my 401(k) loan early without a penalty?

Yes. You can repay the loan in full at any time without penalty. Some people do this if they receive a bonus or inheritance and want to restore their retirement savings. Paying early stops the interest from accruing and gets the money back into your account where it can grow again.

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

No. The interest you pay goes back into your 401(k) account as a contribution, not as income. You do not report it on your tax return. However, when you eventually withdraw that money in retirement, you will pay income tax on it like any other 401(k) distribution.

Can I borrow from my 401(k) if my plan does not allow it?

No. If your plan documents prohibit loans, you cannot borrow. You would have to take a withdrawal instead, which triggers income tax and the 10% penalty if you are under 59½. Some employers offer this restriction to discourage early access to retirement savings. Check your plan documents or ask your plan administrator whether loans are available under your specific plan.