Your 401(k) is money you save for retirement. Some employers allow you to take a loan from your 401(k), and you may decide to use that option to pay a current financial obligation. First, consider the pros and cons so you make the right decision for your future.
The pros
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Access the money that belongs to you.
The money in your 401(k) is yours. It’s intended for retirement, but you could access it for an immediate need such as a medical bill, house, car, college, business startup, debt repayment, or vacation.
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Borrow up to $50,000.
The IRS limits many 401(k) loans to half of your vested balance up to $50,000. That money can help with a current financial need.
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No loan application necessary.
Instead of a complicated external loan process, you usually complete a few plan forms through your employer.
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No credit check required.
Traditional loans and credit card applications often require credit checks. A 401(k) loan is available regardless of your credit score or history.
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Repay the loan automatically.
Repay your 401(k) loan with automatic payroll deductions. You typically have up to five years to repay the loan, unless the loan is for a primary residence.
The cons
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Have less money for retirement.
Borrowing reduces the amount invested and the compound interest you would otherwise earn, which can leave you with less at retirement.
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Pay more taxes.
You contributed pre-tax money to your 401(k), and it grows tax-deferred until withdrawal. Loan repayments are made with after-tax dollars, and you will owe taxes on withdrawals in retirement.
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Repay the loan on time.
Loan terms include repayment conditions you must meet to avoid taxes and penalties. If you leave your employer before repaying, the remaining balance may become due sooner and could be treated as a distribution if unpaid.
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401(k) money is protected from creditors.
Your 401(k) balance is generally protected from creditors and bankruptcy court, but loan proceeds or unpaid loan balances may be treated differently in some situations.
As you decide if a 401(k) loan is right for you, review your plan’s specific rules and repayment requirements and talk to your HR director to ensure you understand the process.
For more information about employer plans and related coverage, see 401(k) and 403(b) retirement plans and related insurance. If you are comparing borrowing options or working with lenders, you may also find helpful information at Loan Brokers Insurance.
If you prefer personal help, you can talk to an agent about how a loan would affect your overall financial and insurance needs.
Frequently Asked Questions
Can I borrow from my entire 401(k) balance?
You can typically borrow up to half of your vested balance, subject to IRS limits and your plan’s rules.
Do 401(k) loans affect my taxes now?
Loan proceeds are not taxed when received, but repayments are made with after-tax dollars and withdrawals in retirement are taxable.
What happens if I leave my job with an outstanding loan?
If you leave your employer, your plan may require repayment in a short period or treat the unpaid balance as a taxable distribution.
Will taking a loan hurt my retirement growth?
Yes; money removed from the account stops earning investment returns and compound interest, which can reduce long-term savings.