You generally cannot take a 401(k) loan from a previous employer. Nearly every plan limits borrowing to active employees on the sponsor’s payroll, because loan payments are collected through payroll deduction and there is no paycheck to deduct from once you leave. If you want to borrow against money sitting in an old 401(k), the practical move is to roll that balance into your current employer’s plan and take the loan there.
Why Former Employees Are Shut Out
Federal tax law lets 401(k) plans offer loans but does not require the feature to be open to separated participants, and almost no plan extends it to them. The IRS requires loan repayments at least quarterly, in substantially level amounts, over the life of the loan.1Internal Revenue Service. Plan Loan Failures and Deemed Distributions Administering that schedule for someone outside the payroll system is a compliance burden most plan sponsors refuse to take on.2The Standard. Taking a Loan From Your Retirement Plan
Some administrators will accept a lump-sum payoff on an existing loan from a separated worker. That is a different transaction than opening a new one, and new loans effectively require active employment.
Roll the Old Balance Into Your Current Plan
If your current employer’s 401(k) accepts incoming rollovers and offers participant loans, you can move the old balance in and then borrow against the combined account under that plan’s rules. Not every plan does both, so confirm with HR or the plan administrator before you start.
Use a direct rollover whenever possible. The old plan sends the money straight to the new one, nothing is withheld, and there is no 60-day clock. If you instead take an indirect rollover, where a check comes to you, the old plan must withhold 20% for federal taxes, and you have 60 days to deposit the full original amount, including the withheld portion from your own pocket, into the new plan or the shortfall becomes a taxable distribution.3Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
To set up the rollover you will need your old account number and administrator contact information on one side, and the new plan’s legal name, employer identification number, and transfer instructions on the other. Electronic transfers often settle in about a week; check-based rollovers typically take two to three. Once the balance posts in the new plan, apply for a loan through that plan’s normal process.
Don’t Roll It Into an IRA If You Want to Borrow
This is where people lose the option without realizing it. IRAs, SEP IRAs, and SIMPLE IRAs cannot offer participant loans. Borrowing from an IRA is a prohibited transaction.4Internal Revenue Service. Retirement Topics – Plan Loans
The penalty is not confined to the amount you tried to borrow. If you take a loan from an IRA, the account loses its IRA status as of the first day of that tax year, and the IRS treats the entire balance as distributed to you at fair market value. You owe income tax on the whole account, plus the 10% early withdrawal penalty if you are under 59½.5Internal Revenue Service. Retirement Topics – Prohibited Transactions If borrowing matters to you, the money has to stay inside a 401(k).
What a 401(k) Loan Actually Looks Like
Once the balance is in a plan that permits loans, the federal ceiling is the lesser of $50,000 or 50% of your vested account balance. If half your vested balance is under $10,000, the plan may let you borrow up to $10,000, though plans are not required to include that exception.4Internal Revenue Service. Retirement Topics – Plan Loans
Repayment runs no longer than five years unless the loan is used to buy your primary home, in which case the plan can set a longer term. Payments must be at least quarterly and roughly level. Miss one and the outstanding balance can be treated as a taxable deemed distribution.1Internal Revenue Service. Plan Loan Failures and Deemed Distributions
If You Already Had a Loan When You Left
A separate problem comes up when you walked away with an active loan still on the books. The plan can demand full repayment quickly. Many plans require the remaining balance to be paid by the end of the calendar quarter following the quarter in which you missed your first payment, though some give you until the next plan quarter or your tax filing deadline. The plan document controls.6Internal Revenue Service. Retirement Plans FAQs Regarding Loans
If you cannot pay in full, the unpaid balance is usually handled as a plan loan offset: the plan reduces your account balance by the loan amount and reports it as a distribution. A loan offset is eligible for rollover, and when it qualifies as a Qualified Plan Loan Offset you have until your tax filing deadline for that year, including extensions, to deposit an equivalent amount into an IRA or another employer’s plan and keep the money out of taxable income.7Internal Revenue Service. Plan Loan Offsets You have to come up with the cash from another source, since the plan already reduced your balance. Any portion you do not roll over is taxed, with the 10% penalty on top if you are under 59½.
Hardship Withdrawal as a Fallback
If you cannot borrow and cannot roll the money somewhere that permits loans, a hardship withdrawal from the old 401(k) is another route, assuming the plan allows separated participants to request one. Plans vary on this, so check the plan document.
You must show an immediate and heavy financial need, and the withdrawal is limited to what is necessary to meet it. The IRS recognizes several qualifying categories:8Internal Revenue Service. Retirement Plans FAQs Regarding Hardship Distributions
- Medical expenses for you, your spouse, or your dependents that are not covered by insurance.
- Payments to prevent eviction or foreclosure on your primary residence, or costs to purchase a primary home.
- Tuition and related fees for the next 12 months for you, your spouse, dependents, or a primary plan beneficiary.
- Burial or funeral costs for a parent, spouse, child, dependent, or primary plan beneficiary.
- Certain repair costs for damage to your primary residence that would qualify as a casualty loss.
- Expenses related to a federally declared disaster if your home or workplace was in the disaster area.
A hardship withdrawal is not repaid. You owe income tax on the full amount, plus the 10% early distribution penalty if you are under 59½. The plan can also require you to exhaust other available distributions first. Given the tax cost, this one makes sense only when the need is real and the alternatives are gone.