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Nerdy takeaways
- The typical 401(k) plan allows you to borrow up to half of your account balance, with a $50,000 maximum, and repay the loan in five years.
- The cost to borrow is relatively low, and the interest paid returns to the borrower’s 401(k) account.
- While the money is borrowed, you miss out on potential stock market gains plus compounding interest that grows your retirement savings.
Many 401(k) plans allow users to borrow against their retirement savings. It’s 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 59 ½.
Employer rules vary, but 401(k) plans typically allow users to borrow up to half of their vested retirement account balance or $50,000 — whichever is less — and repay the loan in five years.
Other retirement plans, such as a 403(b)s (offered to public school and church employees) or 457(b)s (offered to employees of state and local governments) may provide loans against retirement savings, but borrowing guidelines can vary by employer.
Nerdy Perspective
Borrowing from your 401(k) can disrupt the growth of your retirement savings, and you may have to repay the loan fast if you leave your job. So consider other borrowing options first. That said, a 401(k) loan typically has a low interest rate and doesn’t require a credit check, so it may be the least expensive way to consolidate high-interest debt or cover a necessary expense if your credit score is low. But you’ll need a disciplined financial plan to repay the 401(k) loan on time and avoid penalties.
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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 important caveat: 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 . However, it's up to your 401(k) provider whether to allow this exception.
Your plan may also set a maximum number of outstanding loans or require the signed permission of your spouse or partner if the loan is greater than $5,000.
🤓 Nerdy Tip
Vested contributions refers to the matching contributions your employer makes that only become fully “vested” — that is to say, fully yours — if you’ve worked for the company for a set period of time. Some companies provide fully vested contributions immediately. Others may gradually increase the percentage of vested contributions over a number of years of employment. Any contributions you’ve made to your 401(k) is fully vested cash. 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 outstanding balance 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 is one important exception to that rule. If you are using 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.
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 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% and credit card rates can be nearly 30%.
2. Interest paid goes back to you
While interest rates on most loans are paid to the lender, the interest on 401(k) loans goes back into your retirement account, which may help offset lost growth potential.
3. No credit check
Personal loans and other lines of credit often require strong credit and income to qualify or get a low rate. There’s no credit check with 401(k) loans, so a low score isn’t a barrier to borrowing.
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) in order to borrow money.
Moreover, you may have to reduce your 401(k) contributions in order afford loan payments, setting back your retirement savings further.
2. Job loss means faster repayment
As any 401(k) loan is an agreement made with your employer, if you leave your job while repaying your 401(k) loan, the balance may come due quickly.
3. Potential tax penalties for nonpayment
If you’re unable to repay the loan, the IRS will consider the unpaid amount 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.
You may 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.
(See the section on 401(k) withdrawals below for circumstances where you may avoid the 10% early withdrawal penalty.)
401(k) loan vs. 401(k) withdrawal: What’s the difference?
Another way to tap into money from your retirement plan is with a 401(k) withdrawal. The two options differ in their costs and requirements for repayment.
401(k) loan
Costs: The interest you’ll pay on a 401(k) loan is usually a couple percentage points above the prime rate. You don’t have to pay taxes and penalties when you borrow from your retirement account as long as you make regular payments and repay on schedule.
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.
Repayment requirements: You typically have five years to repay a 401(k) loan.
401(k) withdrawal
Costs: Withdrawing money from your 401(k) before age 59½ is generally considered a nonqualified withdrawal, and you must pay a 10% tax penalty. Also, cash received will be taxed as ordinary income for the year.
Certain expenses — such as medical bills or tuition — may qualify as a hardship withdrawal. Hardship withdrawals are not subject to the 10% tax penalty.
A word on emergency withdrawals: A provision of the Secure 2.0 Act allows one withdrawal of up to $1,000 per year to cover an emergency expense. That withdrawal is not subject to the additional 10% tax.
Repayment requirements: When you take a 401(k) withdrawal, you do not have to repay the money.
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 start making payments at least quarterly, though you might make payments more frequently.
Opt for automatic payments to avoid missing a due date. Although defaulting on a 401(k) loan won’t impact your credit, it will convert the unpaid loan balance to a 401(k) withdrawal, which has tax implications.
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 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 you can’t pay off unsecured debts — credit cards, personal loans and medical bills — within five years, or if your total debt equals more than half your income, you might have too much debt to consolidate. Your best option is to consult an attorney or credit counselor about 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.
Alternatives for large expenses
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 line of credit is a low-interest borrowing option for homeowners to cover urgent home repairs or other expenses. 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. Repayment terms can go up to 30 years.
Both home equity loans and lines of credit 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.
» MORE: Home equity loan vs. HELOC
0% APR credit card: Another option is to use a 0% APR credit card. You usually need good or excellent credit to qualify (a score in the mid-600s or higher). You must pay the balance during the interest-free promotional period — usually 15 to 21 months — to avoid paying the card’s (often high) regular APR.
Alternatives for small expenses
Family loans: It’s worth asking a trusted friend or family member for a loan to 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.
Cash advance apps: Cash advance apps let users borrow up to a few hundred dollars and repay it on their next payday. These advances can be a fast way to cover a small, urgent expense. There’s no interest, but the apps often tack on fees for fast funding and ask for optional tips.
Buy now, pay later: If you’re repairing a car, replacing a laptop or buying a new mattress, the merchant may offer “buy now, pay later” plans. This payment plan lets you split up a purchase into smaller, usually biweekly payments. Having bad credit (a score lower than 600) may not prevent you from qualifying, because there’s usually no hard credit check.
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- 1. Internal Revenue Service. Retirement Topics - Plan Loans. Accessed Mar 11, 2026.
