How to Borrow Money From Your 401(k)

How a 401(k) loan works

A 401(k) loan lets you borrow money from your own retirement account instead of taking out a personal loan from a bank. Your employer's plan administrator handles the loan, you repay it to yourself with interest, and the money stays in your account the whole time. The interest you pay goes back into your 401(k), 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, you borrow against the balance you have already contributed, not against future contributions or employer matching. The amount you can borrow and the repayment terms depend on your plan's specific rules and federal limits.

The main trade-off is that money you borrow is not invested and earning returns while you repay it. If you leave your job before the loan is repaid, you typically must repay the full balance quickly or it becomes a taxable withdrawal, which can trigger taxes and penalties.

Key Takeaways

• You can borrow up to 50 percent of your vested 401(k) balance, or $69,000, whichever is less, though your plan may set a lower limit.
• You must repay the loan within five years in most cases, with payments going back into your own 401(k) account.
• If you leave your job, you usually have 60 to 90 days to repay the full loan balance or face taxes and a 10 percent penalty if you are under 59½.
• Loans are not reported to credit bureaus and do not affect your credit score, but they reduce the money available for retirement savings.
• Your plan administrator sets the interest rate, which is typically prime rate plus 1 to 2 percent, and that interest goes back into your account.

Borrowing limits and how much you can take

Federal law caps 401(k) loans at the lesser of two amounts: 50 percent of your vested balance, or $69,000. The $69,000 limit is adjusted annually for inflation, so it may change year to year. Your vested balance is the money that belongs to you — employer contributions may have a vesting schedule that determines when they become yours.

Your employer's plan can set a lower limit than the federal maximum. Some plans allow loans up to only 25 percent of your balance, or cap the dollar amount at $50,000 or less. Check your plan documents or contact your plan administrator to find out what your specific plan permits.

If you have an outstanding loan from the same plan, the new loan amount plus the outstanding balance cannot exceed the federal limit. For example, if you borrowed $30,000 five years ago and still owe $10,000, you can borrow only up to $59,000 more (50 percent of your balance minus the $10,000 still owed).

Repayment terms and interest rates

Most 401(k) loans must be repaid within five years, though loans taken to buy a primary residence may have longer terms — some plans allow 10, 15, or even 30 years. Your plan documents specify the repayment period for each type of loan.

Repayment happens through payroll deduction if you are still employed. Your employer withholds the loan payment from your paycheck and deposits it into your 401(k) account. If you are self-employed or the plan allows it, you may be able to make payments directly to the plan.

The interest rate is set by your plan administrator and is typically the prime rate plus 1 to 2 percent. Unlike a bank loan, all interest you pay goes back into your 401(k) account, not to an outside lender. The interest rate is usually fixed for the life of the loan, though some plans allow variable rates.

Tax treatment while you are repaying

Loan repayments are made with after-tax dollars — the money you use to repay does not reduce your taxable income for the year. When you repay the loan, you are putting money back into your 401(k), and that money will be taxed again when you withdraw it in retirement, which means the repaid amount is taxed twice.

The interest portion of your payment is also made with after-tax dollars and will be taxed again at withdrawal. This double taxation is one reason financial advisors often caution against 401(k) loans unless you have no other option.

While the loan is outstanding, you continue to pay income tax on any employer matching contributions your employer makes, just as you would with regular 401(k) contributions.

What happens if you leave your job

If you leave your employer for any reason — resignation, layoff, or retirement — your 401(k) loan becomes due. Most plans require you to repay the full outstanding balance within 60 to 90 days, though some plans allow longer periods. Check your plan documents for the exact important date.

If you do not repay the loan by the important date, the unpaid balance is treated as a taxable withdrawal. You owe income tax on the full amount, and if you are under 59½, you also owe a 10 percent early withdrawal penalty. This can result in a large tax bill in the year you leave your job.

Some people roll their 401(k) to an IRA or a new employer's plan to avoid this outcome, but most IRAs and employer plans do not allow you to roll over a loan — only the vested balance can be rolled. The loan must still be repaid or it becomes taxable.

How to request a 401(k) loan

Contact your plan administrator or the benefits department at your employer to request a loan process. Many large employers offer this through an online portal or a dedicated benefits website. Smaller employers may require you to fill out a paper form.

You will need to provide basic information: the amount you want to borrow, the reason for the loan (if your plan requires it), and your preferred repayment term. Some plans ask for the purpose of the loan — for example, primary residence purchase, medical emergency, or education — though the purpose does not affect your ability to borrow.

The plan administrator reviews your request to confirm you meet the plan's requirements: you are employed, you have a vested balance, and the loan amount does not exceed the limit. Processing typically takes one to two weeks. Once approved, the funds are deposited into a designated account, usually a checking account you specify.

Alternatives to 401(k) loans

Before taking a 401(k) loan, consider other options. A personal loan from a bank or credit union may have a lower interest rate and does not reduce your retirement savings. A home equity line of credit (HELOC) or home equity loan may offer lower rates if you own a home. A credit card cash advance is expensive but available when ready if you have an emergency.

If you need money for a specific hardship, some 401(k) plans allow hardship withdrawals without a loan. Hardship withdrawals are taxable and subject to the 10 percent penalty if you are under 59½, but they do not require repayment. Hardship withdrawals are typically limited to specific reasons: medical expenses, education costs, home purchase, or preventing eviction or foreclosure.

If you are facing a financial emergency, contact a nonprofit credit counselor through the National Foundation for Credit Counseling (NFCC) to explore all options before borrowing from your retirement account.

Frequently Asked Questions

Can I take out a 401(k) loan if I am self-employed?

If you have a solo 401(k) (a plan for self-employed people), you can borrow from it if your plan document allows loans. The same federal limits explore: 50 percent of your vested balance or $69,000, whichever is less. You must repay the loan on a set schedule, typically through quarterly or monthly payments to your own plan.

What happens to my 401(k) loan if I die?

If you die while a loan is outstanding, the unpaid balance is treated as a taxable distribution to your estate or beneficiaries. They owe income tax on the amount, and if they are under 59½, the 10 percent early withdrawal penalty also applies. The loan does not pass to your heirs — it is settled from your 401(k) account.

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

Yes. Most plans allow you to repay a 401(k) loan early without penalty. Early repayment stops the interest from accruing and gets the money back into your account to resume earning investment returns. Contact your plan administrator for instructions on making an early lump-sum payment.

Does a 401(k) loan show up on my credit report?

No. A 401(k) loan is not reported to credit bureaus and does not appear on your credit report. It does not affect your credit score or count against your debt-to-income ratio when you explore for a mortgage or other loan. The loan is between you and your plan, not a third-party lender.

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

Yes. You can take a 401(k) loan while employed as long as your plan allows loans and you meet the plan's requirements. Repayment is typically deducted from your paycheck. If you later leave your job, the loan becomes due, so you need a plan to repay it if your employment ends.