How to Borrow Money From Your 401(k) and Pay It Back

A 401(k) loan lets you borrow from your own retirement savings and repay it through payroll deductions, with interest going back into your account instead of to a bank.

When you take a 401(k) loan, your plan administrator lends you money from your vested balance—the portion of your account that legally belongs to you. You sign a promissory note agreeing to repay the loan, usually over five years, though some plans allow longer terms for loans used to buy a primary home. The interest rate is typically the prime rate plus one percentage point, set by your plan. Unlike a bank loan, the interest you pay goes back into your own 401(k) account, not to a lender.

The loan amount cannot exceed the lesser of $50,000 or half your vested balance. If your vested balance is $80,000, you can borrow up to $40,000. If it is $90,000, you can still only borrow $50,000. Your plan documents spell out the exact rules for your workplace, including whether loans are even permitted—not all plans offer them.

Key Takeaways

• You can borrow up to $50,000 or half your vested balance, whichever is smaller, and the interest rate is set by your plan, typically prime plus one percent.
• Repayment happens through automatic payroll deductions, usually over five years, and the interest you pay goes back into your own account.
• If you leave your job, most plans require the loan to be repaid within 60 to 90 days or it becomes a taxable withdrawal and may trigger a 10 percent penalty if you are under 59½.
• While you have a loan outstanding, you cannot make new contributions beyond what is needed to cover the loan payment, and your borrowed money stops earning investment returns.
• A 401(k) loan does not require a credit check and does not appear on your credit report, but it does reduce the amount of money growing tax-deferred for retirement.

How the Loan Amount and Interest Rate Work

Your plan administrator calculates your vested balance by looking at contributions you have made and employer matches that have fully vested—meaning you own them outright. Money that is not yet vested cannot be borrowed. Once you know your vested balance, you can borrow up to half of it, capped at $50,000 total across all your employer's plans.

The interest rate is determined by your plan and is usually prime rate plus one percentage point. The prime rate changes when the Federal Reserve acts, so your rate may shift during the loan term if your plan ties it to the prime rate. Some plans set a fixed rate at the time you take the loan. You pay this interest through payroll deductions along with the principal, and every dollar of interest goes directly back into your 401(k) account as if you had invested it yourself.

Repayment typically occurs over five years in equal monthly installments, though plans may allow up to ten years for a loan used to purchase your primary residence. The longer the term, the lower your monthly payment but the more total interest you pay.

Repayment Through Payroll and What Happens If You Leave Your Job

Your employer deducts loan payments from your paycheck automatically, just like a 401(k) contribution. This means the money comes out before taxes, reducing your take-home pay. If you have other debts, this paycheck reduction is a real cost to weigh against the benefit of borrowing from yourself.

If you leave your job—whether you resign, are laid off, or retire—your plan typically requires you to repay the outstanding loan balance within 60 to 90 days. The exact deadline is in your plan documents. If you do not repay by that deadline, the unpaid balance is treated as a taxable distribution. You owe income tax on the full amount, and if you are under 59½, you also owe a 10 percent early withdrawal penalty. On a $30,000 loan balance, that penalty alone is $3,000, plus income tax at your marginal rate.

Some people roll the loan balance into an IRA or new employer plan to avoid this outcome, but that is not automatic—you have to act within the deadline. If your new employer's plan accepts rollovers and allows loans, you might be able to roll the loan into that plan instead of repaying it immediately, though the rules vary by plan.

The Tax and Investment Trade-Offs of Borrowing From Your 401(k)

When you borrow from your 401(k), the money you borrow stops earning investment returns. If your account would have grown at 7 percent annually and you borrow $30,000 for five years, that $30,000 misses out on compound growth. Over five years, that forgone growth could amount to several thousand dollars, depending on market performance.

You also lose the tax-deferred growth on the interest you pay back. Although the interest goes into your account, you are paying it with after-tax dollars from your paycheck. If you had earned that interest through market returns instead, it would have grown tax-deferred. This is a subtle but real cost.

On the other hand, you avoid paying interest to a bank or credit card company, and you avoid a hard inquiry on your credit report. For someone facing high-interest debt, a 401(k) loan at prime plus one percent can be cheaper than alternatives, even accounting for the forgone growth.

Contribution Limits While You Have an Outstanding Loan

While repaying a 401(k) loan, you can still contribute to your 401(k) up to the annual limit set by the IRS. However, your paycheck is already reduced by the loan payment, so the money available to contribute is smaller. Some people find they cannot afford both the loan payment and their usual contribution level.

If your employer offers a match, you should prioritize contributing enough to capture the full match, even if it means reducing other savings. A 401(k) match is immediate return on your money and should not be left on the table.

When a 401(k) Loan Makes Sense and When It Does Not

A 401(k) loan is most useful when you face a genuine short-term need—medical bills, home repair, or avoiding high-interest debt—and you have a stable job where you can repay the loan before leaving. The interest rate is usually lower than credit cards or personal loans, and you avoid the credit report impact.

A 401(k) loan is risky if your job is unstable or you are considering a job change in the next few years. The 60-to-90-day repayment deadline after leaving a job is a hard wall. It is also risky if you are already behind on retirement savings, because the borrowed money stops growing and you are using retirement funds for current expenses.

Some people use 401(k) loans to fund home purchases or renovations. If your plan allows a longer repayment term for primary residence loans, this can work, but you are still reducing your retirement balance and missing out on growth. A mortgage or home equity line of credit is usually a better option because the interest is tax-deductible and the term can be much longer.

How to Request a 401(k) Loan From Your Plan

Contact your plan administrator—usually your employer's benefits department or the third-party company managing the plan. They will give you a loan application form and explain your plan's specific rules: the maximum loan amount, the interest rate, the repayment term options, and the deadline if you leave your job.

You will need to provide basic information: the amount you want to borrow, the reason (some plans ask), and your vested balance. The administrator calculates whether you meet the $50,000 cap and half-balance rule. There is no credit check, no approval delay based on your finances, and no underwriting process. The decision is purely mechanical: do you have enough vested balance, and does your plan permit loans?

Once approved, the administrator sets up the repayment schedule and coordinates with your payroll department to deduct payments. You receive a promissory note documenting the loan terms. Keep this document—you will need it if you change jobs and need to prove the loan balance to your new plan administrator or to an IRA custodian.

Frequently Asked Questions

Can I take out more than one 401(k) loan at the same time?

Most plans allow only one outstanding loan at a time, though some permit two or more if your vested balance is large enough. Check your plan documents or ask your benefits department. The $50,000 cap applies across all loans from all your employer's plans combined, not per loan.

What happens to my 401(k) loan if I get laid off?

You will receive a notice from your plan administrator stating the repayment deadline, usually 60 to 90 days. If you repay in full by that date, there are no tax consequences. If you do not, the unpaid balance becomes a taxable distribution subject to income tax and a 10 percent penalty if you are under 59½. Some people roll the loan into an IRA or new employer plan to avoid this, but you must act within the deadline.

Does taking a 401(k) loan hurt my credit score?

No. A 401(k) loan does not appear on your credit report and does not trigger a credit inquiry. Your credit score is unaffected. However, your take-home pay is reduced by the loan payment, which could affect your ability to may have access to for other loans if a lender reviews your pay stubs.

Can I pay back a 401(k) loan early without a penalty?

Yes. Most plans allow you to repay the loan in full at any time without penalty. Paying early stops the interest from accruing and gets the money back into your account earning investment returns sooner. There is no prepayment fee.

What if I cannot make a loan payment?

If you miss a payment, your plan administrator will likely treat the missed payment as a default. The entire loan balance may become due immediately, or it may be treated as a taxable distribution. Contact your plan administrator right away if you anticipate a missed payment—some plans offer a grace period or forbearance option, though this varies.