You can generally take a loan from an employer-sponsored retirement plan such as a 401(k), 403(b), or governmental 457(b), up to the lesser of $50,000 or half your vested balance, repaid with interest over five years. Borrowing from your pension plan in the traditional sense — a defined benefit pension that promises a monthly check in retirement — is technically allowed by the tax code but almost never offered in practice. And IRAs are off the table entirely. The rules on how much you can take, how fast you must pay it back, and what happens when things go wrong are stricter than most participants realize.
Which Retirement Plans Actually Allow Loans
Loan features live in defined contribution plans, where you have an individual account balance to borrow against. That means 401(k) plans at private employers, 403(b) plans at nonprofits and public schools, and governmental 457(b) plans. Federal tax law permits loans from all of these, but permission is not a mandate. Your specific plan document has to include a loan program. If your employer did not add one, IRS permission alone does not help you.
Traditional pensions — defined benefit plans — are a different animal. IRC Section 72(p) technically applies to any “qualified employer plan,” so a defined benefit plan could offer loans.1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Almost none do. These plans promise a monthly benefit based on salary and years of service, and the assets sit in a single pool for all participants rather than individual accounts. Administering loans against a future benefit stream is complicated, so most defined benefit sponsors leave the option out.
IRAs are prohibited territory. Borrowing from an IRA is a prohibited transaction, and if you do it, the IRS stops treating the account as an IRA as of the first day of that year. The entire balance becomes a taxable distribution.2Internal Revenue Service. Retirement Topics – Prohibited Transactions This applies to traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs alike. If you rolled old employer plan money into an IRA, you cannot borrow against it.
How Much You Can Borrow
The maximum is the lesser of $50,000 or half your vested account balance. Vested is the key word: your own contributions and their earnings are always 100% yours, but employer matching money often takes several years of service to fully vest. Only vested dollars count toward the limit.
On an $80,000 vested balance, the ceiling is $40,000. On a $120,000 vested balance, the ceiling is $50,000, even though half of $120,000 is $60,000.3Internal Revenue Service. Retirement Topics – Plan Loans There is also a floor: if half your vested balance is under $10,000, the plan may allow you to borrow up to $10,000. Plans are not required to offer that floor, so check your plan document.4Internal Revenue Service. Retirement Plans FAQs Regarding Loans
The 12-Month Lookback That Catches People
The $50,000 cap is not a clean number. The statute reduces it by the difference between your highest outstanding loan balance during the 12 months before the new loan and your current loan balance on the day the new loan is issued.1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
Say you borrowed $40,000 last year, paid it off, and now want a new loan. Your highest balance in the past 12 months was $40,000; your current balance is $0. The cap drops by that $40,000, leaving a maximum of $10,000 on the new loan. Paying off the first loan early does not reset your capacity, so there is no advantage to rushing a payoff before requesting a second loan.4Internal Revenue Service. Retirement Plans FAQs Regarding Loans
You can have more than one loan from the same plan at once, so long as the combined balances stay within the limits. Some plans restrict you to a single loan as an administrative choice, though federal law does not require it.
Interest Rate and Repayment Schedule
Federal law requires plan loans to carry a “commercially reasonable” interest rate and “adequate security.”5eCFR. 26 CFR 1.72(p)-1 – Loans Treated as Distributions ERISA adds that the rate must be reasonable and loans must be available to participants on a roughly equivalent basis, without favoring highly compensated employees.6eCFR. 29 CFR 2550.408b-1 – General Statutory Exemption for Loans to Plan Participants Most plans set the rate at the prime rate plus one percentage point. With prime at 6.75% as of late 2025, typical plan loan rates land around 7.75%.
Most plan loans must be repaid within five years, with substantially level installments made at least quarterly.7Internal Revenue Service. Issue Snapshot – Plan Loan Cure Period Loans used to buy your principal residence can run longer; the statute does not set a maximum for home purchase loans. Most employers use automatic payroll deductions.
If you miss a payment, the plan may allow a cure period before treating the loan as in default. The cure period can extend to the last day of the calendar quarter following the quarter in which the payment was due. Miss a February payment and you have until June 30 to catch up.7Internal Revenue Service. Issue Snapshot – Plan Loan Cure Period The plan document has to specifically provide for a cure period, so do not assume you have one.
A note on spousal consent: certain plans, including most defined benefit plans and money purchase pension plans, require your spouse’s written consent before approving a loan because the loan uses your accrued benefit as collateral. Many 401(k) plans are exempt when the spouse is the default beneficiary for the full balance.8Internal Revenue Service. Spousal Consent Period to Use an Accrued Benefit as Security for Loans
What Happens If You Leave Your Job
This is the risk that hurts people most. If you quit, get laid off, or otherwise separate from your employer, the plan sponsor can require full repayment of the remaining balance on a compressed schedule. Many plans demand payoff within 60 to 90 days of your last day.3Internal Revenue Service. Retirement Topics – Plan Loans
If you cannot pay, the unpaid amount becomes what the IRS calls a plan loan offset. When the offset happens because you left the job or the plan terminated, it qualifies as a Qualified Plan Loan Offset (QPLO). You then have until your tax filing deadline for that year, including extensions, to roll the offset amount into an IRA or another eligible plan. Roll it over in time and you owe no tax on it.9Federal Register. Rollover Rules for Qualified Plan Loan Offset Amounts For other kinds of offsets that do not involve job loss or plan termination, the standard 60-day rollover window applies.
Miss the deadline and the unpaid balance is taxable income for that year, plus a 10% early distribution penalty if you are under 59½.3Internal Revenue Service. Retirement Topics – Plan Loans On a $30,000 balance, that can run $7,000 or more in combined federal taxes and penalties depending on your bracket.
What Happens If You Default While Still Employed
Defaulting on a plan loan while you are still working triggers a different outcome. If payments stop and you do not cure the miss within the grace period, the entire unpaid balance plus accrued interest becomes a “deemed distribution.” The IRS taxes you as though you received that money as a withdrawal.10Internal Revenue Service. Fixing Common Plan Mistakes – Plan Loan Failures and Deemed Distributions
The unpleasant twist: a deemed distribution does not erase the loan. You still owe the money back to the plan under the original agreement, but you are also paying taxes on it as though you cashed it out. And unlike a QPLO, a deemed distribution while employed cannot be rolled over to avoid the tax hit.
Exceeding the dollar limit produces only a partial deemed distribution. If you somehow borrowed $60,000 when the maximum was $50,000, only the $10,000 excess is taxable. But if the repayment schedule fails the five-year rule or the quarterly-installment rule, the entire loan balance becomes taxable, even if the amount was within limits.10Internal Revenue Service. Fixing Common Plan Mistakes – Plan Loan Failures and Deemed Distributions
Protections If You Are Called to Active Duty
Federal law lets your plan suspend loan repayments while you are on active military duty. When you return to your civilian job, payments resume at the same frequency and amount as before, and the total repayment period extends by the length of your service. A five-year loan does not default because you were deployed for 18 months.11Internal Revenue Service. Retirement Plans FAQs Regarding USERRA and SSCRA
Interest continues to accrue during the suspension but is capped at 6% under the Servicemembers Civil Relief Act. To get that cap, you have to give the plan sponsor a copy of your orders and specifically request the reduced rate. It does not happen automatically.11Internal Revenue Service. Retirement Plans FAQs Regarding USERRA and SSCRA
The Real Cost of Borrowing From Your Retirement
Plan loans feel painless because the interest goes back into your own account. The actual cost is somewhere else. It is in the market growth your money misses while it sits outside the market. Borrow $30,000 for three years while the market returns 8% annually, and you lose roughly $7,000 in potential growth that would have compounded for decades. By retirement, that gap can be several times larger.
The interest itself creates a second problem. Every dollar of interest you repay comes from income you already paid taxes on. When you eventually withdraw that dollar in retirement, the plan taxes it again as ordinary income. On a loan charging 7.75% over five years, the interest portion is not trivial, and every penny of it gets taxed twice.
If repayment falls apart, the tax consequences stack. Any unpaid amount is reported as a distribution, meaning income taxes at your marginal rate plus the 10% early withdrawal penalty if you are under 59½.12Internal Revenue Service. Considering a Loan From Your 401(k) Plan Treat a plan loan as a last resort. Exhaust emergency savings, a home equity line, or a personal loan at a reasonable rate before touching the account that has to fund decades of retirement.