If you need a loan and have money in a 401(k) plan through your job, you may be able to borrow money from your retirement savings.
A 401(k) loan is a relatively low-interest loan option that can help cover a large expense, but tread lightly. Getting a 401(k) loan can mean long-term retirement losses or penalties if you’re unable to repay the loan.
What is a 401(k) loan?
A 401(k) loan lets you borrow money from your retirement account before you’re qualified to tap into those funds — that is, if you’re younger than age 59½. You can typically borrow up to half of your 401(k) plan’s vested balance or $50,000, whichever is less, but rules can vary depending on your employer.
By the numbers: About 15% of people enrolled in a 401(k) plan allowing loans had an outstanding 401(k) loan in 2023, according to data from the Employee Benefit Research Institute. The average unpaid balance was less than $10,000 and less than 10% of the average participant’s overall 401(k) account balance.
You will usually have five years to repay a 401(k) loan and will be required to make payments at least quarterly. As you make payments, the loan amount and interest paid are put back into your 401(k) account and often reinvested based on your current investment fund selections.
If you have another retirement plan — such as a 403(b), which is offered to public school and church employees, or a 457(b), which is offered to government employees — you may be able to similarly borrow against your retirement savings. But guidelines vary by employer.
What are the rules for a 401(k) loan?
With a 401(k) loan, you are limited to withdrawing either 50% of your vested account balance or $50,000, whichever is less. One exception: If 50% of your vested balance is less than $10,000, you may be able to borrow up to $10,000, according to IRS rules .
For example, if the vested balance in your 401(k) account is $15,000, you may be able to borrow up to $10,000 even though that’s more than half your balance. However, it's up to your 401(k) provider whether to allow this exception.
Your plan may also require the signed permission of your spouse or partner if the loan is greater than $5,000. Contact your plan administrator for information on your specific plan’s rules.
What is the 12-month rule for 401(k) loans?
You may be able to take out several 401(k) loans at once, depending on your plan. However, during any 12-month period, the total amount you can borrow can't exceed the limits of 50% of your vested account balance, or $50,000, whichever is less.
Using a 401(k) loan to purchase a home
Most 401(k) loans have a maximum repayment period of five years. However, there's one exception to that rule: If you use the loan toward the purchase of a primary residence, the term may be extended up to 10 years.
Consult with your plan administrator to determine the length of repayment limits with the purchase of a home.
Pros and cons of 401(k) loans
Pros
Low interest rates.
Interest paid goes back to you.
No credit check.
Cons
Cuts into your retirement savings.
Potential tax penalties for nonpayment.
Job loss means faster repayment.
Benefits of borrowing from a 401(k) plan
1. Low interest rates
Interest rates on 401(k) loans are usually lower than other forms of credit. Interest typically equals the prime rate — which is around 7% at the time of publishing — plus one or two percentage points. This means the rate may be in the single digits.
By comparison, personal loan rates can be up to 36%. The average credit card rate for accounts with assessed interest was 22.36% in August 2026, according to the Federal Reserve.
2. Interest paid goes back to you
For most loans, the interest you pay goes to the lender, but the interest on 401(k) loans goes back into your retirement account. This may help offset some lost growth potential.
3. No credit check
There’s no credit check with 401(k) loans, so a low score isn’t a barrier to borrowing. Personal loans and other lines of credit often require strong credit and income to qualify or get a low rate.
Drawbacks of borrowing from a 401(k) plan
1. Cuts into your retirement savings
When you take money out of your retirement account, you miss out on potential stock market gains and the magic of compound interest.
Although your loan payments are reinvested into your 401(k) account, the cost to purchase shares in your selected investments may increase — meaning you aren’t able to purchase as many shares as you previously had. Also, you lose out on the potential compound interest growth when you shrink your 401(k) balance in order to borrow money.
Additionally, if you have to reduce your 401(k) contributions in order to afford loan payments, that can slow your retirement savings growth even further.
2. Potential tax penalties for nonpayment
If you’re unable to repay the loan, the IRS will consider the unpaid amount as a distribution and count it as income when you file that year’s taxes. You’ll also incur a 10% early withdrawal penalty if you’re under the age of 59½.
(See the section below on 401(k) loans vs. withdrawals for circumstances where you may avoid the 10% early withdrawal penalty.)
3. Job loss means faster repayment
Your 401(k) loan is technically an agreement made with your employer. If you leave your job while you’re still paying off your 401(k) loan, the balance may come due quickly.
If you can’t meet the new deadline for repaying the loan, you risk the IRS labeling the loan balance as a distribution, and you can face early withdrawal penalties.
However, you may be able to avoid tax consequences by rolling over the unpaid loan balance to an IRA or another eligible retirement plan by the due date for filing your tax return for the year you left your employer. For example, if you left your job in January 2026, you’d have to roll over the balance by the April 2027 tax return deadline.
401(k) loan vs. 401(k) withdrawal: What’s the difference?
A 401(k) withdrawal is another way to tap into money from your retirement plan. The two options differ in their costs and requirements for repayment.
401(k) loan | 401(k) withdrawal | |
|---|---|---|
Costs | Interest rate is usually a couple percentage points above the prime rate. | Cash taxed as income, plus 10% tax penalty for nonqualified withdrawals before age 59 ½. |
Repayment | Quarterly payments over five years. | No repayment necessary. |
A word about hardship or emergency withdrawals: There are circumstances when a 401(k) withdrawal is not subject to the 10% tax penalty, including emergency expenses up to $1,000 or expenses up to $5,000 related to the birth or adoption of a child. An early 401(k) withdrawal may also be exempt from tax penalties if you experience a natural disaster, are a victim of domestic abuse, are diagnosed with a terminal illness or become disabled.
How to get a 401(k) loan
1. Review your finances and determine your need
Calculate how much you need to borrow from your 401(k) plan. To reduce the impact to your retirement account, consider other ways to cover part or all of the expense. Perhaps you could tap into an emergency fund, pick up a side gig or seek alternative borrowing methods.
2. Contact your 401(k) plan administrator to apply for a loan
Call your plan administrator or log into your retirement account online to start the loan application process. Be sure you understand all the details regarding how much you can borrow, the interest rate, the loan terms and the repayment process.
3. Get funded and begin making payments
It can take anywhere from a couple of days to a couple of weeks to receive your loan. Once you get the money, you’ll need to make payments at least quarterly, though you can make payments more frequently.
Opt for automatic payments to avoid missing a due date.
Should you borrow from your 401(k) to pay off debt?
Before you get a 401(k) loan to pay off debt, consider other options that won’t impact your retirement savings.
Debt consolidation: Debt consolidation allows you to roll multiple high-interest debts to a balance-transfer card or personal loan, ideally with a lower interest rate. You then have a single monthly debt payment and less total interest cost.
» MORE: Best debt consolidation loans
Debt relief options: If your total unsecured debts — credit cards, personal loans and medical bills — equal more than half your income and you can’t pay them off within five years, you might have too much debt to consolidate. Consult an attorney or credit counselor to discuss debt relief options, including credit counseling or bankruptcy.
401(k) loan alternatives
Because of the risks associated with 401(k) loans, first consider alternative financing options.
Personal loans
You can use a personal installment loan for almost anything, including debt consolidation, home repairs, emergencies and medical bills. Loan amounts typically range from $1,000 to $100,000 with rates from 7% to 36%. Personal loans are repaid in monthly installments over terms that often range from two to seven years.
These loans are usually unsecured, so there’s no collateral required. A lender uses financial and credit information to determine whether you qualify and your loan’s annual percentage rate.
Home equity loans and lines of credit
A home equity loan or home equity line of credit (HELOC) is a low-interest borrowing option if you’re a homeowner. The amount you can borrow is based on how much equity you have in your home — or your home’s value minus what you owe on the mortgage. Rates are often lower than unsecured loans or credit lines, and repayment terms can go up to 30 years.
Both home equity loans and HELOCs require you to use your home as collateral, meaning the lender can foreclose on your home if you fail to repay. The biggest difference between these two financing options is their borrow-and-repay structures.
A home equity loan gives you a lump sum of money with a fixed interest rate. You repay the loan in monthly installments over the term of the loan.
A HELOC provides you with a credit line that you can tap into as needed during the draw period. You typically have a variable interest rate, and you make payments based on the amount you’ve borrowed. As you make payments, you free up more of your credit line to borrow again.
» MORE: Home equity loan vs. HELOC
0% APR credit card
A 0% APR credit card lets you finance expenses at no added cost as long as you pay the balance during the interest-free promotional period — usually the first 15 to 21 months. You typically need good or excellent credit to qualify (a score of 690 or higher). After the interest-free promotional period ends, your card’s APR could be in the double digits.
Family loans
A loan from a trusted friend or family member could help bridge an income gap or cover an emergency. There’s no credit check with a family loan. You can draw up a contract with the lender outlining how the loan will be repaid and at what interest rate.
Article sources
- 1.Internal Revenue Service. Retirement Topics Loans. Accessed Oct 16, 2026.
- 2.Employee Benefit Research Institute. 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2023. Accessed Oct 16, 2026.
- 1.Internal Revenue Service. Retirement Topics Loans. Accessed Oct 16, 2026.
- 4.Wall Street Journal. Prime Rates. Accessed Oct 16, 2026.
- 5.Federal Reserve. Consumer Credit Outstanding. Accessed Oct 16, 2026.
