If your employer’s plan permits it, borrowing from your 401k is generally allowed up to the lesser of $50,000 or 50% of your vested balance, repaid within five years through payroll deductions. Federal law treats the borrowed amount as tax-free as long as you follow the repayment rules. Miss those rules and the balance turns into taxable income, often with a 10% penalty on top. The specifics depend on both IRS limits and your plan’s own terms.
How Much You Can Borrow
The IRS caps 401k loans at the lesser of $50,000 or half your vested account balance.1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Your vested balance is the portion you own outright; employer contributions that haven’t fully vested don’t count. With a vested balance of $120,000, the cap is $50,000. With a vested balance of $40,000, the most you can borrow is $20,000.
There is a floor. You can borrow up to $10,000 even if that exceeds half your vested balance.1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts If your vested balance is $15,000, half is $7,500, but the statute still allows a $10,000 loan. Your plan may set a lower limit.
Watch the 12-month lookback. The $50,000 cap is reduced by your highest outstanding loan balance from the plan during the previous 12 months. If you borrowed $30,000 last year and paid it down to $10,000, your new maximum is $50,000 minus $30,000, not minus the current $10,000.1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts The rule keeps participants from cycling repeatedly through the full limit.
If You Have More Than One Retirement Plan
The $50,000 ceiling is not per plan. If you participate in more than one retirement plan sponsored by the same employer, or by employers in the same corporate group, the limit applies across all of them combined.2Internal Revenue Service. Issue Snapshot – Borrowing Limits for Participants With Multiple Plan Loans A $20,000 loan outstanding in one plan leaves you at most $30,000 available in a second plan maintained by the same employer. Companies under common ownership and affiliated service groups are also aggregated.
Whether Your Plan Even Allows Loans
Federal law permits 401k loans; it does not require your employer to offer them.3Internal Revenue Service. Retirement Topics – Loans Each employer decides. If loans are available, the details are spelled out in the Summary Plan Description, which you can request from HR or the plan administrator.
Plans commonly add restrictions tighter than the IRS rules:
- A minimum loan amount, often $1,000, to avoid the cost of processing tiny loans.
- A limit on how many loans you can have outstanding at once; some plans allow only one.
- Purpose restrictions. Some plans permit only home purchases or medical expenses. Others allow general-purpose loans with no reason required.
These plan-level rules bind you. If your plan caps loans at $25,000, that is your ceiling even though the IRS would allow more.
Interest Rates and Fees
Every 401k loan charges interest, but you pay it back into your own account. Federal rules require the rate to be comparable to what a commercial lender would charge for a similar loan. Most plans set it at the prime rate plus one or two percentage points. Your plan’s Summary Plan Description or loan application will state the exact rate.
Many plans also charge a one-time origination or processing fee, often in the $50 to $100 range, either deducted from the loan proceeds or debited from your account.
One tax detail catches some borrowers off guard: the interest on a 401k loan is generally not deductible, even if the loan pays for a home. And because you repay with after-tax dollars, the interest portion is effectively taxed twice, once when you earn the money to make the payment and again when you eventually withdraw it in retirement. The principal repayment is a wash for tax purposes; the interest is a real added cost.
Repayment Rules and the Home-Purchase Exception
Federal law requires repayment within five years.4Internal Revenue Service. Retirement Plans FAQs Regarding Loans Payments must be substantially equal amounts covering both principal and interest, made at least quarterly.1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Most employers automate the whole schedule through payroll deductions.
Loans used to buy a primary residence are exempt from the five-year rule, and the statute does not set a maximum term.3Internal Revenue Service. Retirement Topics – Loans In practice, the plan document sets the term for home loans; 10, 15, and even 20 years are common. Expect the administrator to require documentation of the home purchase before approving an extended term.5Internal Revenue Service. It’s Up to Plan Sponsors to Track Loans, Hardship Distributions
What Happens If You Miss a Payment
A missed payment doesn’t trigger a tax bill on day one. Many plans include a cure period, a window during which you can catch up before the IRS treats the loan as a distribution.6Internal Revenue Service. Issue Snapshot – Plan Loan Cure Period When a plan allows one, it can extend through the end of the calendar quarter following the quarter in which the payment was due. A February miss (first quarter) gives you until June 30 to make it good.
If you don’t catch up by the end of the cure period, the entire outstanding balance, including accrued interest, becomes a deemed distribution.7Internal Revenue Service. Deemed Distributions – Participant Loans That amount is taxable income for the year, reported on Form 1099-R. Under age 59½, you likely owe an additional 10% early distribution penalty. The cure period is optional; some plans treat a single missed payment as immediate default. Check the plan document.
Leaving Your Job Before the Loan Is Paid Off
This is the biggest risk of a 401k loan. When you leave your employer, whether you quit, are laid off, or retire, the plan may require you to repay the full remaining balance.3Internal Revenue Service. Retirement Topics – Loans Deadlines vary; some plans give a few weeks, others a few months. Miss the deadline and the outstanding balance is treated as a plan loan offset, which is a distribution.
The Tax Cuts and Jobs Act of 2017 built in some relief. If the offset happens because you left the job (a “qualified plan loan offset”), you have until your tax filing deadline for the year of the offset, including extensions, to roll the amount into an IRA or another eligible retirement plan.8Internal Revenue Service. Plan Loan Offsets With a six-month extension, the deadline can stretch from April 15 to October 15 of the following year. A completed rollover avoids both the income tax and the early distribution penalty.
Disaster and Military Service Relief
The SECURE 2.0 Act of 2022 created enhanced rules for federally declared disasters. If you qualify, your plan may raise the maximum loan amount to $100,000, or your full vested balance if lower, instead of the standard $50,000. Plans may also suspend loan repayments for up to one year. Payments due from the start of the incident period through 180 days after it ends can be delayed, with remaining payments recalculated afterward to account for the pause and accrued interest.9Internal Revenue Service. Disaster Relief – Retirement Plans and IRAs Under the SECURE 2.0 Act of 2022 These provisions are optional for employers, so ask your administrator.
If you are called to active military duty, your plan can suspend repayments for the length of your service under the Uniformed Services Employment and Reemployment Rights Act. You will need to provide your orders to the plan sponsor. During the suspension, the interest rate is capped at 6% if you request the reduction. When service ends, you resume payments at the same amount and frequency, and the original deadline is extended by the length of your service.10Internal Revenue Service. Retirement Plans FAQs Regarding USERRA and SSCRA
Spousal Consent
Whether your spouse must sign off depends on your plan type. Federal law requires spousal consent for distributions from defined benefit, money purchase, and target benefit plans, which must offer a qualified joint and survivor annuity.11Internal Revenue Service. Fixing Common Plan Mistakes – Failure to Obtain Spousal Consent Most 401k plans are profit-sharing plans and are generally exempt, provided the plan pays the full death benefit to the surviving spouse and offers no life annuity option.12Internal Revenue Service. Retirement Topics – Qualified Joint and Survivor Annuity Some 401k plans still require spousal consent for loans as their own rule. If yours does, you will typically need a signed and notarized authorization before the loan is processed.
The Cost You Don’t See on the Loan Statement
A 401k loan has no credit check, no application to a bank, and the interest lands back in your own account. It can look nearly free. The largest cost is the one that never appears on any statement: the money you borrowed stops earning investment returns for as long as it is out of the account. Repayments trickle back in, but they miss the compounding growth an uninterrupted investment would have earned. Across a multi-year loan, the lost growth can meaningfully shrink your retirement balance.
Confirm that your plan lets you keep making regular contributions while repaying. Some plans block new contributions until the loan is paid off, which costs you investment growth and any employer match during that stretch. When simultaneous contributions are allowed, the combined bite of loan repayments and ongoing contributions can squeeze your paycheck enough that many borrowers voluntarily cut contributions, with the same long-term effect.