Need quick cash but don’t want to go through a credit check or loan application? If you have a 401(k), you might be able to borrow from your own retirement savings instead. A 401(k) loan gives you access to your money without dealing with banks or lenders.
It’s fast and easy—but there’s a catch. If you can’t repay the loan on time, or you leave your job, you could face taxes, penalties, and long-term damage to your retirement plan. This guide breaks down how 401(k) loans work, what the risks are, and when they’re worth considering.
Key Takeaways
- A 401(k) loan lets you borrow from your retirement savings with no credit check or loan approval process.
- You must repay the loan—with interest—within five years, or risk taxes and penalties.
- Borrowing reduces your long-term investment growth, so it should only be used for urgent, strategic needs.
What is a 401(k) loan?
A 401(k) loan lets you borrow from your own retirement account, typically without involving a lender or undergoing a credit check. If your employer’s plan allows it, you can take out a loan from your vested balance and pay it back—with interest—over a set period.
The interest you pay goes back into your 401(k), not to a bank or credit union. That makes it a unique loan structure compared to traditional options. But you’re still removing money from your retirement fund, which means missing out on potential investment gains while the loan is active.
401(k) loans are often used for major expenses like home repairs, medical bills, or debt consolidation. But they carry real risks if your job situation changes, or you’re unable to repay on time.
Eligibility and Borrowing Limits
Not all 401(k) plans allow loans. You’ll need to check your employer’s specific rules, which are usually found in your plan documents or through your HR department.
Here are the standard requirements and limits set by the IRS:
- Your employer must allow loans: Not all plans do.
- You must still work for that employer: If you’ve left the company, you’re not eligible.
- You can borrow up to 50% of your vested balance, or $50,000—whichever is less.
- Loans must generally be repaid within five years: If the loan is for a primary residence, the term may be longer.
- Only vested funds count: That includes your contributions and any portion of your employer match that’s fully vested.
You typically apply for the loan through your plan administrator or online portal. There’s no underwriting or credit check, since you’re borrowing your own money.
How 401(k) Loan Repayment Works
Repayment on a 401(k) loan is typically automatic. Payments are taken straight from your paycheck until the loan is fully paid off.
Here’s how the repayment process works:
- Loan term: Most loans must be repaid within five years. Home purchase loans can extend to 10 or more.
- Interest rate: Your plan sets the rate, but it’s usually the prime rate plus 1% to 2%.
- Payment method: Payroll deductions are used for repayments, making them automatic and predictable.
- Interest goes back into your account: Unlike traditional loans, you pay yourself back—with interest.
What Happens If You Miss Payments
If you miss payments for 90 days or more, the IRS considers the loan to be in default. That means:
- The unpaid balance is treated as a distribution.
- You’ll owe income taxes on the amount.
- If you’re under age 59½, you’ll also face a 10% early withdrawal penalty.
Leaving Your Job Before Repaying
If you leave your job while a 401(k) loan is still unpaid, you typically have just 60 days to repay the remaining balance. If you can’t, it’s considered a distribution and taxed accordingly—plus that 10% penalty if you’re under retirement age.
This is one of the biggest risks of taking a 401(k) loan. If your job situation isn’t stable, it could backfire fast.
Pros & Cons of Taking a 401(k) Loan
Before you tap into your retirement savings, it helps to see the upsides and risks side by side.
| Pros | Cons |
|---|---|
| No credit check – You’re borrowing from yourself, so there’s no lender approval or credit score requirement. | Loan becomes taxable if you default – Miss payments or leave your job, and the balance is treated as a taxable withdrawal. |
| Lower interest rate – The interest is often lower than credit cards or personal loans. | Lost investment growth – Money borrowed isn’t growing in the market, which can slow your long-term savings. |
| Quick access to cash – You can usually get the funds faster than a traditional loan. | Double taxation – You repay the loan with after-tax dollars, then pay taxes again when you withdraw in retirement. |
| No impact on your credit score – It’s not reported to credit bureaus. | Repayment comes from your paycheck – Lower take-home pay can tighten your budget. |
| Interest goes back into your account – You’re paying yourself, not a bank. | May pause contributions – Some plans won’t let you contribute while repaying the loan. |
When a 401(k) Loan Makes Sense
A 401(k) loan can be a smart option in certain situations—especially if you have a solid job and a clear plan to repay the money quickly.
Here are some common scenarios where it may make sense:
- Buying a home – A 401(k) loan can help you cover a down payment and avoid private mortgage insurance.
- Paying off high-interest debt – If you’re stuck with double-digit credit card rates, borrowing from your 401(k) could save you money—if you’re disciplined about repayment.
- Emergency medical expenses – When you’re hit with a surprise bill and have no other options, this could be a lifeline.
- Avoiding loan denial – If you have poor credit and can’t qualify for a personal loan, this option doesn’t rely on your credit score.
When It Doesn’t Make Sense
- You’re in an unstable job situation and might leave soon.
- You’re borrowing for non-essential purchases or lifestyle upgrades.
- You’re already behind on retirement savings and can’t afford to lose investment growth.
Alternatives to Consider Before Borrowing
Before borrowing from your 401(k), compare your other options. Some may be safer for your long-term finances.
- Emergency savings – Best-case scenario. You’re not borrowing or paying interest, and there are no penalties. Just make sure it’s truly an emergency.
- Home equity loan or line of credit – These loans offer lower interest rates and are tax-deductible in some cases. But you’re putting your home at risk if you can’t repay.
- Personal loan – Personal loans don’t touch your retirement account, and rates can be competitive if you have good credit. But high rates and fees can be a problem if your credit score is low.
- Credit card 0% APR offers – Some cards offer 0% interest for 12–18 months. This can work if you can pay it off in time, but missing payments will trigger high rates.
- Hardship withdrawal from your 401(k) – This isn’t a loan—you’re permanently taking the money out. You’ll likely owe taxes, and if you’re under 59½, you’ll pay a 10% penalty unless you qualify for an exemption.
- IRA 72(t) withdrawals – For those with large IRA balances, this IRS rule lets you take penalty-free withdrawals if you follow a fixed payment schedule. It’s complex and permanent, so talk to a tax pro first.
Final Considerations
Borrowing from your 401(k) might be convenient, but it’s not free money—and it could cost you more than you think.
Every dollar you take out today is a dollar that’s no longer growing for retirement. And if your job isn’t secure, or you can’t commit to steady repayments, the penalties and tax consequences can be steep.
That said, in the right situation—with a plan in place—it can be a helpful tool. Just weigh your options, consider the risks, and think long-term. Short-term relief isn’t worth sabotaging your future.
Frequently Asked Questions
Can I still contribute to my 401(k) while repaying a loan?
It depends on your employer’s plan. Some allow continued contributions while you repay your loan, but others temporarily suspend them until the loan is paid off. Check with your plan administrator to see how your contributions may be affected.
Does the IRS limit how many 401(k) loans I can take?
The IRS doesn’t set a specific limit on the number of loans you can take, but your plan might. Many employers allow only one loan at a time, while others let you take multiple loans as long as you stay within the borrowing limit. Always review your plan’s specific rules.
Will a 401(k) loan affect my retirement savings goals?
Yes. Even if you repay the loan in full, you’re missing out on investment growth while the money is out of your account. That gap can set back your long-term savings—especially if you borrow during a strong market period.
Is there a penalty if I repay my 401(k) loan early?
No. You can repay your 401(k) loan early without facing any penalties or fees. In fact, paying it off sooner can reduce the interest you pay and get your full balance back to work in the market faster.
Can I refinance a 401(k) loan to get better terms?
No. You can’t refinance a 401(k) loan like you would with a mortgage or personal loan. The terms are set by your employer’s plan and can’t be changed once the loan is issued. If you need better repayment terms, you’ll have to work within the rules of your plan or explore other loan options.
