How to Borrow Money From Your 401(k)

You can borrow from your 401(k) while you're still working, but the rules are strict and the costs are real

A 401(k) loan lets you borrow your own money from your retirement account without triggering the early withdrawal penalty. You repay yourself with interest, and the loan doesn't show up on your credit report. But borrowing from your 401(k) shrinks the balance that's growing for retirement, and if you leave your job, the loan typically becomes due within 60 days or it converts to a taxable withdrawal.

Not all 401(k) plans allow loans — your employer decides whether to offer this feature. If your plan does, you'll work through your plan administrator (the company that manages your 401(k), often Fidelity, Vanguard, or Schwab) to set up the loan. The process usually takes one to two weeks.

Key Takeaways

• Your 401(k) plan must permit loans; not all do, so check your plan documents or call your plan administrator first.
• You can borrow up to 50% of your vested balance or $69,000, whichever is less, though your plan may set a lower limit.
• You repay the loan through payroll deductions, typically over five years, and you pay yourself back the interest rather than paying a bank.
• If you leave your job, the loan is usually due in full within 60 days, or it becomes a taxable withdrawal subject to income tax and potentially a 10% early withdrawal penalty.
• The money you borrow stops growing tax-deferred, which can cost you significantly in retirement savings over time.

Loan limits: how much you can borrow

The IRS sets a ceiling: you can borrow up to 50% of your vested balance or $69,000, whichever is smaller. Your vested balance is the portion of your 401(k) that legally belongs to you — employer contributions often vest over time, so you may not be able to borrow against the full account balance.

Your employer's plan can set a lower limit. Some plans cap loans at $50,000 or require a minimum loan amount of $1,000. Check your plan documents or contact your plan administrator to learn what your specific plan allows.

If you have an outstanding loan from the same plan, the $69,000 limit applies to your total borrowed amount across all loans, not per loan. So if you already borrowed $30,000, you can borrow only up to $39,000 more (assuming your vested balance supports it).

Interest rates and repayment terms

Your plan administrator sets the interest rate, which is typically the prime rate plus 1 to 2 percentage points. This rate is fixed for the life of the loan. You're paying interest to yourself — the interest goes back into your 401(k) account — but you're still paying it, and that money comes out of your paycheck.

The standard repayment period is five years, paid through payroll deductions. If you borrow for a home down payment, some plans allow a longer repayment period, sometimes up to 15 years. Your plan documents will specify what's available.

You must make regular payments on schedule. If you miss a payment, your plan administrator may declare the loan in default, which means the unpaid balance becomes a taxable withdrawal. That triggers income tax on the amount and potentially a 10% early withdrawal penalty if you're under 59½.

What happens when you leave your job

This is the biggest risk of a 401(k) loan. When you leave your employer — whether you quit, are laid off, or retire — the loan becomes due in full, usually within 60 days. If you can't repay it, the unpaid balance is treated as a taxable withdrawal.

That means you owe income tax on the full amount at your ordinary tax rate, plus a 10% early withdrawal penalty if you're under 59½. If you borrowed $30,000 and can't repay it, and you're in the 22% tax bracket, you could owe roughly $9,600 in taxes and penalties — money that comes out of your other savings or triggers a bill you have to pay by tax time.

Some plans offer a grace period or allow you to roll the loan into an IRA to avoid when ready default, but this varies. Ask your plan administrator what happens to your loan if you leave, and get the answer in writing.

Tax treatment: what you owe now and later

The money you borrow is not taxed when you take it out — you're borrowing your own money. The interest you pay is also not tax-deductible; it's straightforward repaid into your account.

When you repay the loan, you're using after-tax dollars (money you've already paid income tax on). When you eventually withdraw that money in retirement, you'll pay income tax on it again. This creates double taxation on the repaid amount, which is a cost you don't face with regular 401(k) contributions.

If the loan defaults and converts to a withdrawal, you owe income tax on the unpaid balance in the year it defaults, plus the 10% penalty if you're under 59½.

The hidden cost: lost growth

The money you borrow stops earning investment returns. If you borrow $30,000 and the stock market returns 7% annually, that $30,000 would have grown to roughly $60,000 over 10 years. Instead, you're repaying $30,000 plus interest — typically 6% to 8% — which means you're replacing the borrowed amount but missing out on the higher market returns.

This opportunity cost compounds over decades. The longer until retirement, the more expensive a loan becomes in terms of lost growth. A 35-year-old borrowing $30,000 loses far more in retirement savings than a 60-year-old borrowing the same amount.

Alternatives to borrowing from your 401(k)

Before taking a 401(k) loan, consider other sources. A personal loan from a bank or credit union typically has a lower interest rate than a 401(k) loan and doesn't put your retirement savings at risk if you change jobs. A home equity line of credit (HELOC) or home equity loan offers lower rates if you own a home. A credit card cash advance is expensive but doesn't require repayment on a fixed schedule.

If you're facing a financial emergency, some 401(k) plans allow hardship withdrawals for specific reasons like medical bills, home repairs, or education costs. These are taxable and subject to the 10% penalty if you're under 59½, but they don't have to be repaid and don't create a default risk if you leave your job. Hardship withdrawals are a last resort, but they're worth understanding if a loan isn't available or doesn't fit your situation.

How to request a 401(k) loan

Contact your plan administrator — the company name should be on your 401(k) statements or in your plan documents. Most administrators have an online portal where you can request a loan, or you can call their customer service line. You'll need to provide basic information: the loan amount, the repayment term you want, and the reason (optional, depending on your plan).

The administrator will verify your vested balance, calculate the maximum you can borrow, and confirm your plan allows loans. They'll send you loan documents to sign, which spell out the interest rate, repayment schedule, and what happens if you leave your job. Review these carefully — this is a binding agreement.

Once you sign, the money is usually deposited into a designated account within one to two weeks. Your repayment schedule begins, and the payments come out of your paycheck automatically.

Frequently Asked Questions

Can I borrow from my 401(k) if I'm self-employed or have a Solo 401(k)?

Yes, Solo 401(k) plans can include a loan feature, but you set the terms yourself. You can borrow up to 50% of your vested balance or $69,000, whichever is less, just like a traditional 401(k). However, you must repay yourself on a schedule you set, and the same rules explore if you stop working — the loan becomes due.

What if I can't repay the loan before I leave my job?

The unpaid balance becomes a taxable withdrawal. You'll owe income tax on the full amount at your ordinary tax rate, plus a 10% penalty if you're under 59½. Some plans allow you to roll the loan into an IRA or extend the repayment period, but this varies. Contact your plan administrator when ready if you think you'll leave your job with an outstanding loan.

Does a 401(k) loan affect my credit score?

No. A 401(k) loan doesn't appear on your credit report and doesn't affect your credit score. It's not a debt in the traditional sense — you're borrowing from yourself, not from a lender. However, if the loan defaults and becomes a taxable withdrawal, that doesn't affect credit either, though you'll owe taxes.

Can I take out more than one 401(k) loan at the same time?

Your plan may allow multiple loans, but the $69,000 limit applies to your total borrowed amount across all loans from that plan. If you have loans at multiple employers, each plan has its own $69,000 limit. Check your plan documents or ask your administrator what their policy is on multiple loans.

Is a 401(k) loan better than a hardship withdrawal?

A loan is usually better if you can repay it, because you keep the money in your account and it continues to grow. A hardship withdrawal is taxable and subject to the 10% penalty if you're under 59½, and you lose that money permanently. However, a hardship withdrawal doesn't have to be repaid and doesn't create a default risk if you leave your job. Choose based on whether you can repay and whether you can afford the tax hit.