401(k) Loans: Should You Borrow Against Your Retirement? (2024)

With a 401(k) loan, you can pull money out of your 401(k) to pay for bills, living expenses, or whatever you need. And you can possibly avoid early withdrawal penalties and taxes if you're under 59 ½. You can take out as much as 50% of your vested account balance, up to a maximum of $50,000. Or, if 50% of your vested balance is less than $10,000, you may be able to borrow as much as $10,000. But in most cases, you'll have to repay your loan within five years (or less if you change jobs).

401(k) loans are commonly used to:

Avoid foreclosure/eviction
Clear IRS debt
Buy a home
Pay medical bills
Cover emergencies

A 401(k) loan is often a better idea than an early withdrawal, but consider 401(k) loan alternatives and make sure you understand the rules first.

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Is it a good idea to borrow from your 401(k)?

It’s generally not a good idea to borrow from your 401(k) unless you’re purchasing an asset (like a house) that increases in value over time and has tax benefits, or you’re facing an emergency with very bad credit and have no other options. But according to a study by Fidelity Investments, 401(k) loans and withdrawals were on the rise in Q3 2023 — with more people using funds to pay for medical costs and to avoid foreclosure or eviction.

But borrowing from your 401(k) to cover daily expenses can create a repeated borrowing need, since it reduces your take-home pay. Take the opportunity to instead reevaluate your current budget and your tax deductions. If you’re used to getting a large refund at tax time, consider increasing your deductions so that money is spread out across your paychecks instead.

If you need to borrow for an emergency, consider other options, like an emergency loan. The interest rate will likely be higher, but you could have seven years or more to repay the loan, and you won’t need to jeopardize your retirement to make ends meet.

Tip

Going forward, consider whether an emergency savings plan or more robust insurance coverage could prevent the need to borrow from your 401(k).

How does a 401(k) loan work?

With a 401(k) loan, you borrow money from your own account, so there’s no credit check. You repay the balance plus interest over a maximum of five years. Your employer and the IRS have strict borrowing rules, which you need to follow to avoid a 10% early withdrawal penalty and income taxes on the amount withdrawn.

401(k) loan rules

Loan amounts: You can borrow 50% or up to $50,000 of your vested account balance. However, some plans will let you borrow up to $10,000 if 50% of your vested account balance is less than $10,000.
Repayment: In most cases, you must repay the loan in substantially equal payments on at least a quarterly basis within five years. If you’re unable to repay, the loan will be considered a distribution — making you liable for a 10% early withdrawal penalty and taxes on the balance.
Spousal approval: 401(k) plans generally don’t require your spouse to consent to a loan or distribution, but check with your plan to be sure.
Repayment terms: The maximum loan term is 5 years, unless the 401(k) loan is used to buy a primary residence. In this case, the repayment term may extend beyond 5 years.
Remain with the same employer: To keep a 401(k) loan, you must keep your job during the repayment term. If you’re fired, laid off, or decide to quit, your remaining loan balance could be due immediately, depending on the employer. To avoid this, you may be able to roll a loan with an outstanding balance into an eligible retirement plan by the tax filing deadline. But in most cases, you'll need to pay the balance to avoid tax consequences and penalties for early withdrawal.
Interest: In addition to repaying the principal balance, you must also pay interest on the amount borrowed. The amount is set by the plan administrator, but is based on prime. For example, a plan may charge 1% plus the prime rate. However, interest payments go into your own account.
Loan fees: You may have to pay an origination fee to get the loan. Some loans also charge an annual fee for each year you haven’t repaid the loan in full. For example, Merrill Lynch charges a $75 establishment fee and a $75 annual fee.

401(k) loan double taxation

Some consider that taking a 401(k) loan results in double taxation of retirement funds. But like any loan you’d take from a bank, you’ll pay a 401(k) loan back with after-tax funds. You’ll also pay taxes when you withdraw those funds in retirement. Simply put, in order to spend money that’s been tax-deferred, you need to pay tax on it. An advantage with a 401(k) loan is that the interest you pay goes to yourself.

What if you can’t pay back a 401(k) loan?

Defaulting on a 401(k) loan is expensive. The remaining unpaid balance of the loan would get added to your gross annual income, so you’d pay taxes on it for that year — plus you’d pay an extra 10% penalty for early withdrawal if you were under 59 ½ when you took out the loan.

However, it’s unlikely you’d default if you remain with your employer. Remember, loan payments are deducted from your paycheck. But if you lose or change your job and don’t roll the loan into an eligible retirement plan, you’d have to pay it back in full. If you can’t, you’d default. If you do roll the balance into an IRA, for example, you’d need to make payments directly and could default if you stop making payments.

Bottom line: Don’t default on a 401(k) loan.

How to get a 401(k) loan

Here is how to take out a loan from your 401(k).

Contact your employer: Most employer retirement plans have an online system housing your account info and self-servicing options. That’s where you’d go to take out a 401(k) loan. You could also call your employee benefits center to have someone talk you through the process.
Review your balance: Run the numbers for a 401(k) loan using a retirement plan loan calculator to weigh the cost of borrowing. Don’t skip this step. You’ll want to know how this could impact your future.
Determine how much you want to borrow: During the loan application, choose the loan amount you need. Remember, you can’t borrow more than 50% of your vested account balance or $50,000. However, if 50% of your vested balance is less than $10,000, you may be able to borrow up to $10,000.
Understand your repayment terms, fees, and interest rate: Note any upfront fees charged, what the interest rate is, and how much will be deducted from your paycheck to pay back the loan. Also thoroughly review plan disclosures.

Try to answer these questions for yourself before finalizing the loan documents.

Do the loan payments fit my budget?
Do I have the reserves to pay this if I get laid off unexpectedly?
Will I have time and resources to replenish my retirement savings?
Is this really my only option? What alternatives am I not considering?

401(k) loans: Pros and cons

The disadvantages of taking a 401(k) loan could outweigh the pros. Be sure to read through to the alternatives below before making a final decision.

Pros

Lower interest rate: The interest rate on a 401(k) loan is lower compared to other retail lending options. Typically, it’s the prime rate plus 1% to 2%. As of November 2023, the prime rate is 8.50%, which makes a 401(k) loan about 9.50% to 10.50% APR, depending on your plan’s administrator.
Relatively fast funding: As early as your next paycheck, you could see the money in your account.
No credit check: A 401(k) loan could be your only loan option if you have bad credit, since there’s no credit check to qualify.
Automatic repayments: Repaying the loan is simple, as it comes directly from your paycheck before it reaches your account to spend.

Cons

Limited loan amount: Since the IRS limits 401(k) loan amounts to 50% of your vested balance, you might not be able to borrow as much as you need.
Potential penalties and taxes: If you lose your job and can’t pay back the loan, it’s considered a distribution and will be taxable as regular income. Plus, if you were under 59 ½ when you took out the loan, you’d owe an additional 10% on the amount of the distribution.
Reduces potential gains: When you take a 401(k) loan, you’re pulling that money out of the stock market, where it potentially earns you more money. According to Merrill Lynch, a $10,000 loan on a balance of $50,000 that appreciates 5% annually could cost you almost $13,000 in missed gains over 5 years.
Loan fees: You may have to pay fees for your 401(k) loan. Some employers tack on origination fees, annual fees, or default fees if you fail to repay the loan.
No protection in bankruptcy. If you have to file bankruptcy to have your debts discharged, your 401(k) loan won’t be one of them. You’re still responsible for repaying the loan. On the bright side, the balance in your 401(k) is usually protected in bankruptcy.

401(k) loans vs. personal loans

Choosing to go with a personal loan may be better than a 401(k) loan, since it doesn’t impact your retirement savings. Although the interest is higher on average, personal loans provide greater flexibility regarding loan amounts, loan terms, and transferability between jobs. The downside is that you’ll need a good-enough credit score and sufficient income to qualify for a personal loan.

Learn More: 401(k) Loan vs. Personal Loan

	401(k) loan	Personal loan
APR	Generally 1% to 2% over the prime rate (currently 8.50%)	Average APR of 21% for 5-year loans and 15% for 3 year loans.
Loan amount	50% of your vested balance or $50,000 OR up to $10,000 if 50% of your vested balance is less than $10,000 (some plans) (whichever is less)	$600 to over $100,000
Loan terms	Up to 5 years (longer if used for a home purchase)	1 to over 7 years (depending on lender and loan purpose)
Credit check required?	No	Typically yes
Minimum credit score	No minimum, no credit check	Usually 620 or higher (some lenders accept lower scores)
Fees	Origination fees, annual fees, default fees (depending on employer)	Origination fees, late fees, insufficient funds fees (depending on lender)

401(k) loan

Personal loan

APR

Generally 1% to 2% over the prime rate (currently 8.50%)

Average APR of 21% for 5-year loans and 15% for 3 year loans.

Loan amount

50% of your vested balance or $50,000 OR up to $10,000 if 50% of your vested balance is less than $10,000 (some plans) (whichever is less)

$600 to over $100,000

Loan terms

Up to 5 years (longer if used for a home purchase)

1 to over 7 years (depending on lender and loan purpose)

Credit check required?

Typically yes

Minimum credit score

No minimum, no credit check

Usually 620 or higher (some lenders accept lower scores)

Fees

Origination fees, annual fees, default fees (depending on employer)

Origination fees, late fees, insufficient funds fees (depending on lender)

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Loan Amounts

$5000 to $100000

Min. Credit Score

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Note that unlike most lenders, Lightstream does not let you prequalify. Nor does it provide a contact phone number next to its customer service hours on its website.

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Min. Credit Score

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Overview

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Min. Credit Score

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Overview

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Funds are available as soon as the next business day after loan approval.

Loan amount

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Repayment terms

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Fees

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Discounts

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Eligibility

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Customer service

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401(k) hardship distribution

Depending on your situation, you might qualify to claim a hardship distribution from your 401(k) — which means no loan, no repayment, and no 10% penalty for early withdrawal. You’re required to have an “immediate and heavy financial need” and are limited to withdrawing only the amount necessary to satisfy that need. For example, you might qualify if you’re facing:

Certain medical expenses
Costs to buy a home
Tuition and educational expenses
Eviction or foreclosure on your primary home
Funeral and burial costs
Essential repairs for damage to your home (in some cases)
Losses from a federal disaster declaration

Alternatives to a 401(k) loan

Personal loan: A personal loan is probably the closest in function to a 401(k) loan. You’ll get the best rates with good credit, but may still qualify for a bad-credit personal loan, especially if you have a cosigner or can secure the loan with collateral.
State, local, and government programs: Down payment assistance programs (if you’re buying a home) may help with your down payment, provided that you meet program qualifications.
Equity in your home: A home equity loan or line of credit is a loan that uses your residence as collateral and often carries lower interest rates than other alternatives. You need to have sufficient equity in your home and good enough credit to qualify, and, because the loan is secured by your home, you could lose it if you default.
Revolving credit: A credit card that has a low or 0% promotional APR could be an excellent alternative to a 401(k) loan. You’ll need good credit to qualify and should pay off all or a bulk of the amount you borrow within the low APR period.

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401(k) loan FAQ

Can I take out a 401(k) loan if I have an outstanding loan from another retirement account?

You can take out a second loan on your 401(k) if you already have an outstanding loan. It just can’t exceed the lesser of $50,000 or 50% of your vested balance.

What happens to my 401(k) loan if I change jobs or get laid off?

If you’ve changed jobs, been laid off, or decided to quit, the full remaining balance of your 401(k) loan could be due immediately or within the next 90 days. To avoid this, you can roll that balance into an IRA or other eligible retirement account and continue making payments.

Meet the expert:

Seychelle Thomas

Seychelle Thomas (she/her) is an ex-banker of seven years turned personal finance writer. She's a Nav-certified credit and lending expert who is passionate about empowering people to make smart financial decisions. In her writing, she explores a variety of debt consolidation, budgeting, credit, and lending topics.

FAQs

401(k) Loans: Should You Borrow Against Your Retirement? ›

In most cases, it would be better to leave your retirement savings fully invested and find another source of cash. On the flip side of what's been discussed so far, borrowing from your 401(k) might be beneficial long-term—and could even help your overall finances.

Is it a good idea to borrow from your retirement? ›

“As a general rule, dipping into your retirement funds to cover a short-term need could end up costing you more in the long run. If it's possible, I'd encourage you to consider other ways to access cash that could be more beneficial to your long- and short-term financial goals,” Feist says.

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What is the downside of a 401k loan? ›

If times get tough and you're not able to repay the loan in time, it will be counted as a withdrawal from your retirement savings. You'll have to pay income tax on the money, plus a ten percent penalty for early withdrawal if you are under age 59½ and the withdrawal did not qualify for an exception.

Discover More Details ›

Is it smart to borrow from a 401k to pay off debt? ›

Among the pros of a 401(k) withdrawal is that you won't have to repay those funds. Taking money from your 401(k) can make sense when paying off high-interest debt, like credit cards, Tayne said. On the downside, your retirement savings balance will drop.

Can I take a loan against my 401k if I am retired? ›

More In Retirement Plans

Your 401(k) plan may allow you to borrow from your account balance. However, you should consider a few things before taking a loan from your 401(k). If you don't repay the loan, including interest, according to the loan's terms, any unpaid amounts become a plan distribution to you.

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What happens when you borrow from your retirement account? ›

Drawing from a 401(k) means you are essentially borrowing your own money with no third-party lender involved. As a result, your loan payments, including interest, go right back into your 401(k) account. Unlike other loans, 401(k) loans generally don't require a credit check and do not affect a borrower's credit scores.

Does a 401k loan affect your credit score? ›

Moreover, a 401(k) loan won't affect your credit at all — even if you default on it. Low interest rates. You'll pay a modest interest rate and this money goes straight into your retirement account.

Read On ›

Is it better to take out a personal loan or a 401k loan? ›

Key takeaways. You can borrow from a 401(k) without tax or early-withdrawal penalties if you repay the loan within five years. A personal loan beats credit cards and other high-interest debt—and may not crack your nest egg. Early withdrawals from retirement savings can mean big penalties and leave your future behind.

Find Out More ›

At what age is 401k withdrawal tax free? ›

Once you reach 59½, you can take distributions from your 401(k) plan without being subject to the 10% penalty. However, that doesn't mean there are no consequences. All withdrawals from your 401(k), even those taken after age 59½, are subject to ordinary income taxes.

Why shouldn't you borrow from your retirement account? ›

Key Takeaways. Before borrowing, consider that you'll have to repay the loan with after-tax dollars, and you could lose investment earnings on the money while it's out of the account.

How do I pay back a 401k loan? ›

How Do I Repay a 401(k) Loan? Like 401(k) contributions, loan repayments are typically made through payroll deductions. In general, a 401(k) loan must be paid back within five years, unless the funds are used to purchase a home.

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Why would a 401k loan be denied? ›

Other reasons for a denial include exceeding your loan limit, your plan allows for only one loan at a time, or your reason for seeking the loan doesn't meet plan criteria (i.e., you want to use the funds to finance your next vacation).

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Is it smart to cash out your retirement? ›

It's a good rule of thumb to avoid making a 401(k) early withdrawal just because you're nervous about losing money in the short term. It's also not a great idea to cash out your 401(k) to pay off debt or buy a car, Harding says. Early withdrawals from a 401(k) should be only for true emergencies, he says.

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Is it a good idea to borrow from a 401k to pay off credit cards? ›

If you have a high-interest debt, such as from a credit card with a big balance, you may get a much lower interest rate on a 401(k) loan. If you have upcoming debt payments and no other alternatives for paying them, borrowing from your 401(k) can reduce fees and penalties.

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