Your 401(k) account will finance your retirement, but you may be considering accessing those funds earlier. Learn the pros and cons of borrowing from your 401(k) so you can decide whether this financial move is right for you.
401(k) Borrowing Pros
As long as you remain with your current employer, many plans allow a loan from your 401(k). Typically, you can borrow the lesser of $50,000 or half of your vested account balance, subject to your plan's rules.
- Use the money for almost any purpose, such as repaying debt, covering medical expenses, sending a child to college, buying a car, or making a down payment on a house
- Borrow regardless of your credit score
- No need to complete a traditional loan application
- Repay the loan with automatic payroll deductions
- Standard repayment terms often allow up to five years with no penalty for early repayment
401(k) Borrowing Cons
Although the funds are available, taking money from your retirement account reduces the amount that can grow over time and may lower your retirement savings.
- Potentially pay “double taxes” because you repay the loan with after-tax dollars and will owe taxes when you withdraw the money in retirement
- If you leave your employer before the loan is repaid and are under age 59½, the unpaid balance may be treated as a taxable distribution and could be subject to a 10 percent penalty
- Borrowed amounts are no longer protected from creditors or bankruptcy
- Interest rates may be higher than other borrowing options when considering opportunity cost
How to Borrow From Your 401(k)
Before taking a loan, decide why you need the money and whether you can realistically repay it. Borrowing can hurt your long-term savings if your finances are unstable.
Talk to your Human Resources manager to confirm whether your employer's plan allows loans and what the specific rules are.
If you want more information about retirement plan rules and related coverage, see 401(k) and 403(b) Retirement Plans and Related Insurance.
If you are exploring other loan options or want to compare risks and protections, you may also review Loan Brokers Insurance.
If your plan permits a loan, complete the required paperwork (which may require an HR signature) and arrange repayment; in many cases you receive the funds within a few weeks.
Know the pros and cons before you borrow so you can make an informed decision, and discuss your situation with your Human Resources manager or a financial advisor, or talk to an agent.
Frequently Asked Questions
How much can I borrow from my 401(k)?
Most plans allow you to borrow up to the lesser of $50,000 or half of your vested account balance, but exact limits depend on your plan's rules.
What happens if I leave my job with an outstanding 401(k) loan?
If the loan isn't repaid according to the plan's terms, the outstanding balance may be treated as a taxable distribution and could incur a penalty if you are under 59½.
Do I pay interest on a 401(k) loan?
Yes, you pay interest on the loan, and repayments are typically made with after-tax dollars; interest payments go back into your account but do not replace the growth you may lose while funds are withdrawn.
Can I borrow from my 401(k) if I have bad credit?
Yes, 401(k) loans do not rely on credit scores, but eligibility and terms depend on your employer's plan.