401(k) loans, explained
A 401(k) loan sounds almost too good: borrow your own money, skip the credit check, and pay the interest to yourself instead of a bank. For the right borrower it really is one of the cheapest ways to get cash. For the wrong borrower it quietly drains the one account doing the heavy lifting for retirement, and a job change can turn the balance into a surprise tax bill. This guide walks through the IRS rules, the honest math on double taxation and lost growth, how a 401(k) loan stacks up against a personal loan, and a simple test for whether you should take one at all.
How a 401(k) loan works
A 401(k) loan lets you borrow from your own retirement account and pay it back to yourself, usually through automatic payroll deductions. You are not withdrawing the money, so there is no tax or early withdrawal penalty as long as you follow the repayment rules. The loan does not appear on your credit report, and approval does not depend on your credit score. If your plan allows loans and you have a vested balance, you can generally borrow.
That last part matters: loans are a plan feature, not a right. The IRS permits them, but each employer decides whether to offer them and on what terms. Some plans allow only one loan at a time, some charge origination fees of $50 to $100, and some limit loans to hardship situations. Your plan document or HR portal has the specifics, and most 401(k) providers let you model and request a loan online in minutes.
Funding is fast, typically a few business days. That speed, plus the lack of a credit check, is why 401(k) loans show up so often in emergencies, home down payments, and high-interest debt payoffs. The question is never whether you can get the money. It is whether pulling it out of the market and putting your retirement account at risk is worth what you save on interest.
The IRS rules: limits, repayment, and interest
How much you can borrow
The IRS caps a 401(k) loan at the lesser of $50,000 or 50% of your vested account balance. Vested is the key word: your own contributions are always 100% vested, but employer matching money may vest over several years. A plan may also allow up to $10,000 even if that exceeds half your vested balance, though many plans skip that option. One wrinkle catches repeat borrowers: the $50,000 cap is reduced by your highest outstanding loan balance over the previous 12 months, so you cannot pay off a loan in March and re-borrow the full amount in April.
How repayment works
Loans must be repaid within five years through substantially level payments made at least quarterly, and in practice almost always through payroll deduction every pay period. The one exception is a loan used to buy your primary residence, which plans may stretch over a longer term, often 10 to 15 years. Miss the payment schedule beyond your plan’s cure period and the outstanding balance becomes a deemed distribution: taxable income, plus a 10% penalty if you are under 59 and a half.
The interest goes to you
The IRS requires a commercially reasonable rate, and most plans set it at the prime rate plus 1 to 2 percentage points, which works out to roughly 8 to 9% as of mid-2026. Unlike a bank loan, every dollar of that interest lands back in your own account. That does not make the loan free, as the next sections show, but it does mean the quoted rate overstates the true cost compared with a loan where the interest leaves your pocket for good.
The job-loss problem (and the rollover window)
This is the risk that turns a cheap loan into an expensive mistake. When you leave your employer, whether you quit or get laid off, most plans will not keep collecting payroll payments. If you cannot pay the balance quickly, the plan offsets your account: it subtracts the unpaid loan from your balance and reports it as a distribution.
The rules here got friendlier in 2018 and remain so in 2026. For a qualified plan loan offset, one triggered by leaving your job or the plan shutting down, you have until the federal tax filing deadline for that year, including extensions, to come up with the money and roll it into an IRA or your new employer’s plan. Do that and the offset is treated like any other rollover: no tax, no penalty. So a loan offset in October 2026 can be cured as late as April 2027, or October 2027 with a filing extension.
Miss the window and the unpaid balance becomes taxable income for the year of the offset, plus the 10% early withdrawal penalty if you are under 59 and a half. On a $30,000 unpaid balance for someone in the 22% bracket, that is roughly $9,600 in combined federal tax and penalty, before any state tax. The practical rule: never take a 401(k) loan you could not scramble to repay within a few months if your job disappeared tomorrow.
The real cost: double taxation and lost growth
The double-taxation claim, sized honestly
You will read that 401(k) loans are double taxed. The truth is narrower. The principal you borrow went in pre-tax and goes back in the same way, so it is taxed once, at withdrawal, like all traditional 401(k) money. Only the interest is double taxed: you pay it with after-tax paycheck dollars, and it is taxed again when withdrawn in retirement. On a $20,000 loan at 9% over five years, total interest is about $4,800, and the extra tax on that slice usually amounts to hundreds of dollars over a lifetime, not thousands. Real, but not the main cost.
Lost growth is the bigger number
The bigger cost is that borrowed dollars are out of the market. If you pull $30,000 for five years and the market returns 7% a year, the foregone growth is roughly $12,000, partially offset by the interest you pay yourself. In flat or falling markets the loan can accidentally work in your favor, but you cannot time that. Over decades, money removed during strong years and repaid slowly is how a loan quietly shrinks a retirement balance.
The contribution pause is the silent killer
The most damaging pattern, according to essentially every study of participant behavior, is borrowers who cut or stop contributions to afford loan payments. Stop a $500 monthly contribution with a 50% employer match for five years and you give up $15,000 of free match money plus all its compounding. If a loan only works for your budget by pausing contributions below the match, the loan is far more expensive than its interest rate suggests.
401(k) loan vs personal loan
The right comparison depends almost entirely on what rate your credit can get you elsewhere. As of mid-2026, personal loan APRs run from roughly 7% for excellent credit to 36% at the legal ceiling most mainstream lenders observe.
- Excellent credit (740+): A personal loan at 7 to 11% costs about the same as a 401(k) loan without touching retirement money or adding job-loss risk. The personal loan usually wins. Compare offers on our personal loans page before deciding.
- Good credit (670 to 739): Personal loans around 12 to 18% make this a genuine toss-up. The 401(k) loan is cheaper on paper; the personal loan is safer. Job security should be the tiebreaker.
- Fair or bad credit (under 670): Personal loan offers of 20 to 36% make the 401(k) loan clearly cheaper, and it may be the only low-cost option available. It is often the rational choice here, with the job-loss caveat in mind.
- High-rate credit card debt: Swapping 22%+ card APR for a 9% loan you pay yourself can be a strong move, but only if the cards stay at zero afterward. Borrowing from retirement to clear cards you then refill is the worst outcome available.
If you are not sure where your credit lands, start with our guide to personal loan rates by credit tier and prequalify with a soft pull before assuming the 401(k) is your cheapest source of cash.
When it makes sense, and when it is a trap
Reasonable uses
- Paying off high-rate debt when your credit blocks cheaper refinancing, with a hard commitment not to re-borrow on the cards.
- A short-term bridge with a defined payoff, such as covering a home purchase gap of a few months.
- A true emergency when the alternatives are payday-grade credit or an early 401(k) withdrawal, which is strictly worse because tax and penalty apply immediately.
Warning signs it is a trap
- Your job or industry feels shaky. A layoff plus an outstanding loan is the classic path to a five-figure tax bill.
- You would need to cut contributions below the employer match to afford payments.
- The loan funds lifestyle spending: a wedding, vacation, or car you could not otherwise afford. Consumption borrowed from retirement is the most expensive consumption there is.
- This would be your second or third loan. Serial 401(k) borrowing is a sign the real problem is a budget gap, and no loan fixes that. A funded emergency account does; see our high-yield savings guide at /savings/hysa once the immediate crunch passes.
One more option worth knowing: since 2024, IRS rules allow plans to offer a $1,000 emergency personal expense withdrawal once per year without the 10% penalty. For a small emergency, that can beat setting up a loan at all. Ask your plan administrator whether it is offered.
Frequently asked questions
How much can I borrow from my 401(k)?
IRS rules cap a 401(k) loan at the lesser of $50,000 or 50% of your vested balance. So with a $60,000 vested balance you can borrow up to $30,000, and with $200,000 you top out at $50,000. There is one small exception: the law allows plans to lend up to $10,000 even if that is more than half your vested balance, though many plans do not offer it. The $50,000 cap is also reduced by your highest outstanding loan balance during the previous 12 months, so paying off a loan does not instantly reset your full limit.
Does a 401(k) loan affect my credit score?
No. There is no credit check when you borrow, the loan does not appear on your credit reports, and even a default is not reported to the credit bureaus. That makes a 401(k) loan one of the few ways to borrow with damaged credit at a low rate. The cost of default shows up on your tax return instead: an unpaid balance is treated as a distribution, which means income tax plus a 10% penalty if you are under 59 and a half.
What happens to my 401(k) loan if I quit or get laid off?
Most plans require faster repayment when you leave the job. If you cannot repay, the plan offsets your account balance by the unpaid amount. Since the 2017 tax law, you have until the federal tax filing deadline for that year, including extensions, to deposit the offset amount into an IRA or new employer plan and avoid taxes. Miss that window and the balance becomes taxable income, plus a 10% early withdrawal penalty if you are under 59 and a half.
Is 401(k) loan interest really double taxed?
Partly, and the claim is often overstated. You repay the loan, including interest, with after-tax paycheck dollars, and that money is taxed again when you withdraw it in retirement. But that is only true of the interest portion. The principal you borrowed came out pre-tax and goes back in the same way, so it is taxed once, just like any other traditional 401(k) money. The double tax is real but small: on a $20,000 loan it might amount to a few hundred dollars of extra lifetime tax, not thousands.
Is a 401(k) loan better than a personal loan?
It depends mostly on your credit and job security. A 401(k) loan usually charges prime plus 1 to 2 points, roughly 8 to 9% as of mid-2026, with the interest going back into your own account, and approval is automatic. A borrower with excellent credit can find personal loans in a similar range with no risk to retirement savings, so the 401(k) loan adds risk without saving much. For borrowers with fair or bad credit facing 20 to 36% personal loan APRs, the 401(k) loan is often the cheaper option, as long as the job is stable and the payoff plan is short.
Can I still contribute to my 401(k) while repaying a loan?
Usually yes, and you should if at all possible. Most plans let you keep contributing during repayment, though a minority suspend contributions. The biggest hidden cost of a 401(k) loan is not the interest, it is borrowers who pause contributions to afford the loan payments and lose the employer match and years of compounding. If repaying the loan forces you to stop contributing up to the match, the true cost of the loan jumps sharply.
- 1IRS limits: the lesser of $50,000 or 50% of your vested balance, repaid within 5 years through payroll deduction (longer for a home purchase).
- 2No credit check, no credit reporting, and interest (typically prime plus 1 to 2 points, roughly 8 to 9% as of mid-2026) goes back into your own account.
- 3Leave your job with a balance outstanding and you have until the tax filing deadline, including extensions, to roll the offset into an IRA and avoid tax plus a 10% penalty.
- 4Only the interest is double taxed, a small cost. Lost market growth and paused contributions are the expensive part.
- 5With excellent credit, a personal loan at a similar rate is usually safer. With fair or bad credit, the 401(k) loan is often the cheapest option available.
- 6Never borrow an amount you could not repay within months of a surprise layoff, and never pause contributions below your employer match to afford payments.
Prequalify for a personal loan with a soft pull and see whether your credit gets a rate that keeps your 401(k) untouched.