Max Loan From a 401(k): Federal Ceilings and Repayment Rules

The max loan from a 401(k) is $50,000 or half your vested account balance, whichever is smaller. That headline number gets trimmed further if you’ve had any loan activity in the past twelve months, and your employer’s plan can set stricter limits than federal law requires. Some plans don’t offer loans at all.

The Two Federal Ceilings

Federal tax law puts two caps on 401(k) loans, and you’re bound by whichever produces the smaller figure.¹ The first is a hard dollar limit of $50,000. No matter how large your account, you cannot borrow more than $50,000 from a single employer’s plans. The second is tied to your vested balance: you can borrow up to half of it.

Your vested balance includes everything you contributed, any rollover money, and the portion of employer contributions you’d keep if you left the company today. Unvested match or profit-sharing dollars don’t count.

Two quick examples. If your vested balance is $150,000, half is $75,000, but the $50,000 cap wins, so your starting maximum is $50,000. If your vested balance is $60,000, half is $30,000, which is under $50,000, so $30,000 is your starting maximum. “Starting” is the key word, because a separate rule usually trims that number further.

How Recent Loans Reduce the Amount Available

The $50,000 cap is not a number you can hit repeatedly by paying off one loan and taking another. The tax code reduces it based on your borrowing over the past year. The reduction equals the difference between the highest outstanding loan balance you carried at any point in the one-year period ending the day before your new loan, and whatever you currently owe on the date of the new loan.²

The formula: $50,000 minus (highest balance in the past year minus current balance) equals your adjusted cap. Then compare that adjusted cap to 50% of your vested balance and take the smaller.

If You Fully Paid Off a Prior Loan

Say your vested balance is $120,000 and you paid off a $20,000 loan two months ago. Your current balance is $0, and your highest balance in the past year was $20,000. The reduction is $20,000 minus $0, so $20,000. Your adjusted cap is $50,000 minus $20,000, or $30,000. Half of $120,000 is $60,000, so the smaller figure, $30,000, controls.³

If You Still Owe on an Existing Loan

Now say you still owe $15,000 on an existing loan, and your highest balance over the past year was $20,000. The reduction is $20,000 minus $15,000, or $5,000. Your adjusted cap is $50,000 minus $5,000, or $45,000. But you already owe $15,000, and your new loan plus all outstanding loans cannot exceed that $45,000. So the most you can add on a new loan is $30,000. If half your vested balance is lower than $30,000, that smaller number applies instead.³

This is the piece that trips people up. If you’ve had any loan activity in the past twelve months, your available amount is almost certainly less than the raw $50,000 or half-vested figure suggests.

The $10,000 Floor for Small Balances

There’s a lesser-known exception for participants with small accounts. The tax code actually says the vested-balance limit is the greater of half your vested balance or $10,000.¹ So if your vested balance is $15,000, half of that is only $7,500, but the $10,000 floor could allow a $10,000 loan. Plans are not required to include this exception, so check your plan document before assuming it’s available.⁴

Your Plan Can Set Tighter Limits

The numbers above are federal maximums. Your employer’s plan document can always be more restrictive. Some plans cap loans at a lower dollar amount or a smaller percentage. Some allow only one outstanding loan at a time; others permit multiple loans as long as the combined total stays within the statutory ceiling.³ A meaningful number of plans don’t offer participant loans at all. The Summary Plan Description spells out exactly what your plan allows.⁴

If you participate in more than one plan maintained by the same employer, or by related companies in the same controlled group, the $50,000 cap applies across all of those plans combined, not to each separately.³ Borrowing $40,000 from one plan and $30,000 from another puts you over the limit even though each loan is under $50,000 on its own.

Repayment Rules That Keep the Loan a Loan

Getting the amount right is only part of the compliance picture. If the repayment structure fails IRS rules, the outstanding balance gets reclassified as a taxable payout.

Five-Year Rule and Level Payments

The general rule: repay within five years, with payments at least every quarter in roughly equal installments covering both principal and interest.² Most employers deduct payments straight from your paycheck. A lump-sum payoff at the end of the term isn’t allowed; payments have to stay level throughout.⁵

Longer Terms for Buying a Home

Loans used to buy your primary residence can be repaid over a longer period. The tax code doesn’t specify a maximum, just that the term be “reasonable.” Plan documents commonly allow 10 to 30 years for home purchase loans.⁵ The proceeds must go toward buying the home you’ll actually live in. Refinancing a mortgage or buying a vacation property doesn’t qualify.

The Cure Period for a Missed Payment

Missing a payment doesn’t trigger an immediate default. The IRS gives you a cure period that generally runs to the end of the calendar quarter following the quarter the payment was due. Miss a payment due in July, and you have until December 31 to catch up. If you don’t, the remaining balance becomes a taxable distribution.⁴

Leaving Your Job With a Balance Outstanding

This is where most people run into trouble. When you separate from your employer, payroll deductions stop. Some plans let you keep paying directly through the original term. Others demand full repayment within a short window after your last day. The plan document controls.

If you can’t repay, the plan will typically reduce your account balance by the outstanding loan amount. That’s called a plan loan offset, and the IRS treats it as an actual distribution, not a deemed one. The distinction matters for one reason: a plan loan offset is eligible for rollover.⁶

Before 2018, you had 60 days to come up with the cash and roll the offset amount into an IRA or another employer plan. The Tax Cuts and Jobs Act extended that. For qualified plan loan offset amounts, you now have until your tax return due date, including extensions, for the year the offset occurs.⁷

What Happens If You Exceed the Limit or Default

When a 401(k) loan fails the rules on amount, schedule, or timing, the IRS treats the outstanding balance as a deemed distribution. The loan may still exist on the plan’s books, but for tax purposes you’re treated as though you took a cash payout.⁵

That amount gets added to your taxable income for the year the failure occurs. A $40,000 default lands on your tax return as $40,000 in ordinary income, potentially pushing you into a higher bracket. Unlike a plan loan offset, a deemed distribution cannot be rolled over to avoid the tax.⁶

If you’re under 59½ when it happens, you’ll also owe a 10% early distribution penalty on top of the income tax.⁸ On a $40,000 default, the penalty alone is $4,000, and federal income tax could add another $8,000 to $12,000 depending on your bracket. Running the math carefully before you borrow is worth whatever time it takes.

1
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
2
Internal Revenue Service. Retirement Plans FAQs Regarding Loans
3
Internal Revenue Service. Issue Snapshot – Borrowing Limits for Participants With Multiple Plan Loans
4
Internal Revenue Service. Retirement Topics – Plan Loans
5
Internal Revenue Service. Deemed Distributions – Participant Loans
6
eCFR. 26 CFR 1.402(c)-2 – Eligible Rollover Distributions
7
Federal Register. Rollover Rules for Qualified Plan Loan Offset Amounts
8
Internal Revenue Service. Topic No. 558, Additional Tax on Early Distributions From Retirement Plans Other Than IRAs