What You Need To Know About 401(k) Loans

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A 401(k) is a financial instrument you can use to save for retirement. You and your employer can both contribute, and the account accrues returns. There are some financial actions you may be able to take with your 401(k) if you need to, depending on whether the program managers and your employer allow them. You can take a loan from your 401(k) instead of paying double-digit interest to a credit card company if you're in a pinch and need money quickly.

You'd pay interest to yourself, effectively contributing more money to your retirement plan. But there are a few considerations you keep in mind before taking a loan from your retirement account. There's a maximum amount you can take out, and a repayment period must be met.

Key Takeaways

  • A 401(k) loan doesn't require a credit check.
  • The loan application process is easy, and it's not reported to the credit bureaus.
  • You'll pay interest, but it's paid into your own account. You're effectively paying it to yourself.
  • You can only borrow 50% of your balance or $50,000, whichever is less.
  • You'll have a deadline by which you must repay the loan, and the repayments don't count as contributions.

The Positive Aspects of 401(k) Borrowing

The whole point of a 401(k) is to put away money that you won't touch until retirement but taking a loan from your plan might be your best option under certain circumstances. A high-interest title loan, a credit card cash advance, or even a more reasonable personal loan can still cost more than double the interest you'd pay on a 401(k) loan.

There are a few redeeming factors that can make these loans sensible under certain circumstances and if you know you'll have the means to repay the loan within a short term, The designers of the 401(k) plan have the option to include the ability for you to take hardship distributions, which allow for withdrawals from the account for defined hardships, such as emergency medical expenses or mortgage payments.

The Downside of 401(k) Loans

There are a few major catches to a retirement account loan. Your retirement plan assets, such as a 401(k), 403(b), traditional IRA, Roth IRA, simplified employee pension (SEP) IRA, or SIMPLE IRA, would be protected if you should ever find that you have to declare bankruptcy. They're safe havens or lockboxes that creditors have a very hard time touching. 

That money becomes available to creditors after it's taken out of the account in the form of an outright withdrawal or a loan.


Your entire 401(k) loan balance is due within 60 days if you lose your job or change employers.

Not All 401(k) Plans Let You Take Loans

The law allows companies to offer 401(k) loans in their plans, but companies aren't required to do so. In fact, some employers oppose the idea of 401(k) loans because management or owners believe that retirement assets in these accounts should be held beyond reach and out of the way of temptation. Some employer plans only permit 401(k) loans for specific purposes.

A number of people who had been living with too much debt found themselves unable to make credit card payments or pay their mortgage during the Great Recession of 2008 and 2009. Many decided to take a loan until they found out that their company plan didn't offer 401(k) loans for that very situation, to prevent people from losing their retirement assets when markets fluctuate and cause other losses.


Instead of declaring bankruptcy or going into foreclosure, many workers attempted to withdraw from their 401(k) assets during the Great Recession, which triggered regular income taxes plus a 10% penalty for those who were under the age of 59½.

The Maximum You Can Borrow

The biggest 401(k) loan you can take is equal to 50% of your account balance or $50,000, whichever is less, even if you have millions of dollars in your retirement account. There are no exceptions. It can make more sense to use your savings than to withdraw from your retirement plan and lose the opportunity for it to earn more money for you.

The Interest Rate on Your Loan

You must pay interest when you're repaying money borrowed from your retirement plan. It's typically the prime rate plus 1% to 2%. You're paying the interest to yourself so it's something of a transfer from one pocket to another rather than a real expense, but you still have to come up with the cash.

The Repayment Period for 401(k) Loans

You're required to repay the money, with interest, over a period of 60 months when you borrow from your 401(k) account. That five-year period can be extended for those who use the borrowed money to purchase a primary residence, but the terms of a 401(k) loan aren't going to be nearly as attractive as those of a traditional mortgage loan from a local bank in most cases.

Consider a 401(k) Loan Very Carefully

A 401(k) plan can be a great way to save for retirement by building wealth through years of tax-advantaged compounding but removing money from the account early through a loan can really cost you. This is the case even if you intend to repay the funds. Review all the pros and cons as they pertain to your specific situation and speak with your financial advisor before making your final decision.

Frequently Asked Questions (FAQs)

Who sets the interest rate on a 401(k) loan?

Unfortunately, you don't control the interest rate on these loans, even though you're effectively paying the interest to yourself. The plan sponsor does.

What happens if I can't repay my 4019k) loan?

The Internal Revenue Service (IRS) and your state will treat the funds as a withdrawal if you can't repay your loan within the prescribed period of time. You'll owe all federal and state income taxes on it, plus an additional 10% penalty if you're under the age of 59½.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. The Federal Reserve Board. "Early Withdrawals From Retirement Accounts During the Great Recession."

  2. IRS. "Retirement Plans FAQs Regarding Loans."

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