Can I Borrow From My Retirement? Limits, Repayment, and Defaults

Yes, you can usually borrow from your retirement account if it’s an employer-sponsored plan like a 401(k), 403(b), governmental 457(b), or the federal Thrift Savings Plan, and if your specific plan document permits loans. Federal law caps the loan at the lesser of $50,000 or 50% of your vested balance, and you generally repay it with interest over five years through payroll deductions.¹ IRAs do not allow loans at all. Borrowing from your retirement account is cheaper than defaulting on a credit card, but it carries real costs and a serious trap if you leave your job before the loan is paid off.

Which Accounts Let You Borrow

Federal law permits, but never requires, employer-sponsored plans to include a loan feature. The plan types that can offer loans are 401(k) plans, 403(b) plans, governmental 457(b) plans, and profit-sharing and money purchase pension plans.¹ The Thrift Savings Plan for federal employees and uniformed service members also offers loans, with a general purpose loan repaid over one to five years and a primary residence loan repaid over five to fifteen years.²

Even if the law allows loans, your employer may have decided not to offer them, or may have restricted them. Check your plan’s Summary Plan Description or ask your plan administrator before you count on the option.

IRAs are different. Traditional, Roth, SEP, and SIMPLE IRAs cannot offer participant loans. If you borrow from an IRA or pledge it as collateral, the IRS treats the whole account as distributed on the first day of that tax year. You would owe income tax on the full account value and, if you’re under 59½, a 10% early distribution penalty.³

How Much You Can Borrow

The federal cap is the lesser of $50,000 or 50% of your vested account balance.⁴ If your vested balance is $80,000, your maximum is $40,000. If your vested balance is $200,000, the cap holds at $50,000.

A small-balance exception helps participants with less saved: if 50% of your vested balance is under $10,000, you may still borrow up to $10,000, provided it doesn’t exceed your actual balance.⁴ So a $15,000 balance still supports a $10,000 loan even though half is only $7,500.

If you’ve had a plan loan recently, the $50,000 cap gets reduced by the highest outstanding balance you carried in the previous 12 months. Say you borrowed $30,000 eight months ago and have since paid it down to $10,000. Your new maximum is $50,000 minus $30,000, which equals $20,000, not $50,000 minus $10,000.⁴ Some plans permit more than one loan at a time, but the combined balance still can’t exceed the federal cap.⁵

Repayment Terms

You must repay the loan in substantially level payments made at least quarterly, with the full balance and interest paid off within five years.⁴ Most plans handle repayment automatically through payroll deduction.

There is one exception. If you use the loan to buy your primary residence, the five-year clock doesn’t apply, and the plan can set a longer term. The TSP allows up to 15 years for a residential loan.¹² This exception covers buying a home, not refinancing or improvements.

If you miss a payment, most plans offer a cure period before treating the loan as a default. The longest cure period the law allows runs through the end of the calendar quarter after the quarter in which the payment was missed. Miss a payment in February (first quarter) and you have until June 30 to make it up. If you don’t, the entire remaining balance including accrued interest is treated as a distribution.⁶

Interest and the Real Cost

Your loan must carry a “reasonable” interest rate, meaning something comparable to what a commercial lender would charge for a similar loan.⁷ Most plans set it at the prime rate plus one or two percentage points. With prime at 6.75% as of early 2026, a typical plan loan rate runs roughly 7.75% to 8.75%. The TSP uses a different benchmark, tying its rate to the prior month’s G Fund interest rate.²

Because you’re borrowing from yourself, the interest goes back into your own account. That sounds like a win, and it partly is, but there’s a catch. If you borrowed from pre-tax contributions, you repay the interest with after-tax dollars, and when you withdraw that money in retirement, you pay income tax on it again. The principal doesn’t have this problem, since it was pre-tax going in and gets taxed once on the way out. Roth-sourced loans avoid the double-taxation issue on interest because qualified Roth withdrawals are generally tax-free.

The bigger cost is opportunity cost. To fund the loan, the plan sells investments in your account. Until you repay, that money isn’t in the market. If stocks climb during your repayment years, those gains are gone for good.

The Trap: Leaving Your Job

If you quit, get laid off, or retire with an outstanding loan, most plans require full repayment shortly after separation. If you can’t pay, the remaining balance becomes a “plan loan offset,” which the IRS treats as an actual distribution.⁸

You can still avoid the tax hit by rolling the offset amount into an IRA or another eligible plan, but the deadline depends on why the offset happened:

If the offset was triggered by job separation or plan termination (a qualified plan loan offset), you have until your tax filing deadline for that year, including extensions. For most people that means roughly October 15 of the following year if you file an extension.⁹
For any other reason, you have only 60 days from the date of the offset.⁹

Miss the deadline and the offset amount is taxable income, plus the 10% early distribution penalty if you’re under 59½.¹⁰ Before changing jobs, check your loan balance and figure out whether you can either pay it off or cover the rollover.

What a Default Costs

If you stop paying and the cure period passes, the IRS treats the remaining loan balance as a “deemed distribution.” You owe income tax on the full amount, plus the 10% penalty if you’re under 59½.¹¹⁰ A $30,000 default for someone in the 22% bracket who is under 59½ works out to roughly $9,600 in combined tax and penalty.

A deemed distribution differs from a plan loan offset in one important way: the loan balance stays on the plan’s books, so you may still owe repayments even after paying the tax.⁸

If You Only Have an IRA: The 60-Day Rule

IRAs don’t allow loans, but the 60-day rollover rule can serve as a very short bridge. You withdraw money from your IRA, use it, and redeposit the full amount into the same or another IRA within 60 calendar days. Meet the deadline and the withdrawal isn’t taxed.¹¹

The catches are significant. You can do only one IRA-to-IRA rollover in any 12-month period, and that limit applies across all your IRAs combined.¹¹ Miss the 60 days and the entire amount becomes taxable, with the 10% penalty on top if you’re under 59½. The IRS can waive the deadline in limited circumstances beyond your control, but there’s no guarantee. This is an emergency tool, not a borrowing strategy.

Hardship Withdrawals if a Loan Isn’t Enough

If your plan doesn’t offer loans, or the cap doesn’t cover what you need, a hardship withdrawal may be available. You don’t repay it, but you owe income tax on the amount and the 10% early distribution penalty if you’re under 59½.¹²

You have to show an “immediate and heavy financial need.” The IRS safe harbor list of qualifying reasons includes medical expenses for you or your family, costs of buying a primary residence, tuition and related education costs for the next 12 months, payments needed to prevent eviction or foreclosure, funeral expenses, and certain repairs to your primary residence. The withdrawal is limited to the amount of your actual need, including anticipated taxes.¹²

Because a hardship withdrawal permanently reduces your retirement savings with no repayment mechanism, it’s generally a last resort after a plan loan has been ruled out.

1
Internal Revenue Service. Retirement Topics – Loans
2
Thrift Savings Plan. TSP Loan Booklet
3
Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts
4
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
5
Internal Revenue Service. Borrowing Limits for Participants With Multiple Plan Loans
6
Internal Revenue Service. Issue Snapshot – Plan Loan Cure Period
7
eCFR. 29 CFR 2550.408b-1 – General Statutory Exemption for Loans to Participants and Beneficiaries
8
Internal Revenue Service. Plan Loan Offsets
9
eCFR. 26 CFR 1.402(c)-2 – Eligible Rollover Distributions
10
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
11
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
12
Internal Revenue Service. Retirement Topics – Hardship Distributions