There are two realistic ways to borrow against retirement funds. If you have a 401(k) and your plan permits loans, you can borrow up to $50,000 or half of your vested balance, whichever is less, and pay it back through payroll deductions over five years. If you have an IRA, direct loans are prohibited by federal law, but you can withdraw money and redeposit it within 60 days without triggering taxes or penalties. Each path has strict rules, and missing a deadline on either one can convert what you thought was a loan into a taxable distribution.
How Much You Can Borrow From a 401(k)
First, check whether your plan actually offers loans. Not all do. Your summary plan description or HR department can confirm it. If loans are available, Section 72(p) of the Internal Revenue Code caps the amount 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 There is a floor: even if half your vested balance is below $10,000, you can borrow up to $10,000 as long as the plan holds that much.
The $50,000 cap gets reduced by your highest outstanding loan balance during the 12 months before the new loan. If you borrowed $30,000 last year and paid it down to $5,000, your current cap is $20,000, not $50,000.1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts This rolling lookback stops participants from cycling repeated large loans.
Your vested balance is the portion you actually own. Employer matching contributions often vest on a schedule, so your total account balance and your borrowable balance may be very different numbers. Pull your vesting schedule before you assume anything.
Interest, Fees, and Spousal Consent
Most plans set the interest rate at prime plus one percentage point. With prime at 6.75% in early 2026, that puts typical 401(k) loan rates near 7.75%. The interest you pay goes back into your own account, which sounds like a win until you account for the market returns the borrowed balance is no longer earning. The real cost of the loan is the growth you give up during the repayment term.
Many plans also charge an origination fee at the start and a quarterly or annual maintenance fee during the loan. These amounts vary. On a small loan, they can erase whatever rate advantage you expected over a bank product, so ask about them before signing.
If your plan provides a qualified joint and survivor annuity, married participants face another step. Section 417(a)(4) requires your spouse to consent in writing before the plan can use your account balance as collateral, and the consent has to be given within the 90 days before the loan is secured.2Internal Revenue Service. Issue Snapshot – Spousal Consent Period to Use an Accrued Benefit as Security for Loans Some plans require the signature to be notarized or witnessed by a plan representative.
Applying and Repaying
The application goes through your plan administrator, not a bank. Larger providers offer an online portal where you pick the amount, review terms, and submit the request. Smaller plans may use paper forms. Direct deposit is fastest; a paper check adds mail time. Processing generally takes five to seven business days, longer if spousal consent, vesting checks, or missing documents hold things up.
Before you commit, read your summary plan description for restrictions that go beyond federal law. Some employers cap the number of outstanding loans, limit the reasons you can borrow, or set minimum loan amounts. When your plan’s rules and federal rules differ, the stricter one controls.
Federal law requires substantially level payments at least quarterly, with a maximum term of five years.1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Most plans run payments through automatic payroll deductions each pay period, which comfortably meets the quarterly minimum. Each payment covers principal and interest, and the whole amount flows back into your retirement account.
One exception extends the term: a loan used to buy a primary residence can be repaid over a longer period, with the specific maximum set by your plan.3Internal Revenue Service. Retirement Topics – Plan Loans This covers only a home you’ll live in, not a vacation home, rental, or renovation.
Early payoff is usually allowed. Contact the administrator to arrange a lump-sum payoff or accelerated payments so the money starts earning returns again sooner.
What a Missed Payment Costs
If your plan offers a cure period, you typically have until the end of the calendar quarter following the quarter in which a payment was missed to catch up. A February miss gives you until June 30 to make it right. If you still haven’t paid by then, the entire outstanding balance, including accrued interest, becomes a deemed distribution.4Internal Revenue Service. Issue Snapshot – Plan Loan Cure Period
A deemed distribution means the IRS treats the unpaid balance as if you cashed it out. You’ll owe income tax on the full amount, plus a 10% early withdrawal penalty if you’re under 59½.5Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions The sting in the tail: you still owe the loan back to the plan after the deemed distribution. You took the tax hit without getting any additional money.6Internal Revenue Service. Plan Loan Failures and Deemed Distributions
Leaving Your Job With a Loan Outstanding
If you quit, get laid off, or retire with an unpaid balance, most plans give you a short window to repay in full. When that passes, the remaining balance becomes a plan loan offset, which the IRS treats as a distribution.
Since 2018, you don’t have to roll that amount over within 60 days. For a plan loan offset caused by job separation or plan termination, you have until your tax filing deadline for that year, including extensions, to roll the offset amount into an IRA.7Internal Revenue Service. Plan Loan Offsets Separate from your employer in 2026 and file an extension, and you have until October 15, 2027 to complete the rollover. Make it in time, no tax and no penalty.
Miss that deadline and the offset becomes taxable income, with a 10% early withdrawal penalty on top if you’re under 59½.5Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions Think honestly about how stable your job feels before you borrow. A $30,000 loan that converts to a $30,000 distribution can cost $10,000 or more in combined federal and state taxes.
Borrowing From an IRA: The 60-Day Rollover
IRAs don’t offer loans. The workaround is the 60-day rollover under Section 408(d)(3) of the Internal Revenue Code.8Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts
You request a distribution from your IRA, use the money, and redeposit the full amount into the same or another eligible retirement account within 60 calendar days. Make the deadline and the IRS treats the whole thing as a rollover rather than a withdrawal, so no tax and no penalty.8Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts
Two hard limits apply. You can only do this once in any 12-month period, and the limit applies across all your IRAs combined. Traditional, Roth, SEP, and SIMPLE IRAs are all treated as a single account for this purpose.9Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions Trustee-to-trustee transfers and Roth conversions don’t count against this limit; any indirect rollover where you personally receive the money does.
Second, the 60 days is absolute. Miss it by one day and the entire distribution becomes taxable income, with the 10% penalty if you’re under 59½.5Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions When you redeposit the money, confirm the receiving institution codes it as a rollover contribution rather than a regular contribution, so it doesn’t eat into your annual contribution limit.
The Withholding Trap
When your IRA custodian sends you a distribution, they will withhold 10% for federal taxes by default unless you specifically elect out.9Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions Request $20,000 and $2,000 gets withheld, so you receive $18,000. But you still have to redeposit the full $20,000 within 60 days to avoid taxes on the shortfall.
That missing $2,000 comes out of your own pocket. If you can’t replace it, the withheld amount counts as a taxable distribution. You’ll get it back as a refund when you file, but you’ve triggered unnecessary taxes and possibly a penalty in the meantime. The fix is simple: on the distribution form, elect out of withholding.
If You Miss the 60-Day Deadline
If a legitimate reason stopped you from completing the rollover in time, Revenue Procedure 2020-46 lets you self-certify to the receiving institution.10Internal Revenue Service. Accepting Late Rollover Contributions There is no fee. You complete the IRS model certification letter and submit it to the financial institution. The qualifying reasons include hospitalization, a family member’s death, a postal error, and a financial institution’s mistake, among others listed in the model letter.11Internal Revenue Service. Retirement Plans FAQs Relating to Waivers of the 60-Day Rollover Requirement Once the barrier is resolved, you generally need to complete the rollover within 30 days.
Self-certification isn’t a guaranteed pass. If the IRS later audits and finds you didn’t qualify, you’ll owe the taxes and penalty retroactively. And if the IRS previously denied you a waiver through a private letter ruling, you can’t use self-certification at all.11Internal Revenue Service. Retirement Plans FAQs Relating to Waivers of the 60-Day Rollover Requirement
Why You Can’t Just Take a Loan From an IRA
Borrowing from an IRA is a prohibited transaction. Try to structure a direct loan to yourself and the consequences are severe: the entire IRA stops being an IRA as of January 1 of that year. The full account balance is treated as distributed to you at fair market value, which triggers income tax on the whole amount plus the 10% penalty if you’re under 59½.12Internal Revenue Service. Retirement Topics – Prohibited Transactions The 60-day rollover is the only compliant way to temporarily access IRA money.
Lower-Risk Alternatives
Roth IRA Contribution Withdrawals
If you have a Roth IRA, you can withdraw your original contributions at any time, for any reason, with no taxes and no penalties. Distributions come out of contributions first, then conversions, then earnings. As long as you stay within the total you’ve contributed over the years, you won’t owe anything. There’s no 60-day deadline and no repayment schedule. The tradeoff is that the money leaves the account permanently unless you re-contribute within annual limits.
SECURE 2.0 Emergency Expense Withdrawals
Starting in 2024, if your plan has adopted this provision, you can withdraw up to $1,000 from a 401(k) or IRA without the 10% early withdrawal penalty for an unspecified personal or family emergency.5Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions You still owe income tax, but the penalty waiver softens the hit.
You can take one emergency withdrawal per calendar year. Repay it within three years and the IRS treats it like a loan, letting you recover the taxes paid. If you don’t repay, you can’t take another emergency withdrawal until three years have passed. For small, unexpected expenses, this often beats a 401(k) loan: no interest, no mandatory repayment schedule, and nothing to default on if your job situation changes.