401(k) loan rules: limits, repayment, and leaving a job

A 401(k) loan lets a participant borrow from a workplace retirement account when the plan permits it. The money is not generally taxed when borrowed if the loan stays within federal limits and follows its repayment schedule. That makes it different from an ordinary withdrawal.

The distinction can disappear after a missed payment or job change. A loan that stops meeting the rules may become a taxable distribution, and the account loses whatever growth the borrowed money might have earned while it was out of the plan.

The Retirement Savings Calculator can compare a starting balance with and without the amount taken out. It does not model a plan loan directly, but it makes the foregone-growth question visible.

A plan does not have to offer loans

Federal tax rules allow loans from some workplace plans, including 401(k), 403(b), and governmental plans. They do not require a plan to make them available. IRAs and plans based on IRAs, such as SEP and SIMPLE IRA arrangements, cannot offer participant loans.

The plan document controls the practical details. It may set a minimum loan, limit the number of outstanding loans, restrict the reasons for borrowing, charge setup or maintenance fees, and choose how payments come out of payroll. The summary plan description or loan policy should spell this out.

Check the plan before running the numbers. An online loan formula cannot show whether a particular plan permits the transaction.

How the federal loan limit works

Under Internal Revenue Code Section 72(p), the general ceiling is the lesser of:

  • $50,000, reduced when the participant had another plan loan outstanding during the previous year; or
  • 50% of the participant's vested account balance.

The law also contains a $10,000 floor in the second part of that test, but a plan is not required to let someone with a small vested balance borrow the full $10,000. IRS guidance notes that a plan offering that option may require additional security.

Only the vested balance enters the calculation. Employee contributions are normally fully vested, while some employer contributions vest over time. An account may show $80,000 in total assets but a smaller amount available for the loan limit.

Existing loans matter too. The $50,000 ceiling can be reduced by the difference between the highest outstanding loan balance during the prior 12 months and the balance on the date of the new loan. Paying off one loan and immediately opening another does not necessarily restore the full ceiling.

Most loans have a five-year clock

A plan loan generally must be repaid within five years with substantially level payments made at least quarterly. Plans often use payroll deductions on a weekly, biweekly, semimonthly, or monthly schedule.

A loan used to acquire the participant's principal residence can have a longer term. The exception is narrower than "anything related to a home." Repairs, furnishings, rent, and a vacation property do not automatically qualify as acquiring a principal residence. The plan decides what documentation it needs and which repayment terms it offers.

The federal regulation at 26 CFR 1.72(p)-1-1) gives examples of the five-year rule, level payments, defaults, and principal-residence loans.

The payment can strain a budget even when the interest returns to the account

Plan-loan interest is generally credited to the participant's own account. That sounds cheap, but it does not erase the cash-flow burden. Payments come from current income, and plan fees may sit on top of them.

Consider a purely illustrative $20,000 loan with an 8% annual rate and 60 monthly payments. The payment would be about $405.53 a month. Over five years, the borrower would send about $24,331.67 back to the account. These are example figures, not a current rate quote or a forecast for any plan.

Check whether that payment fits alongside rent or a mortgage, insurance, other debt, and ordinary retirement contributions. Some borrowers cut new 401(k) contributions while repaying a loan. If that reduction causes them to miss an employer match, the lost match belongs in the cost comparison.

Use the 401(k) Match Calculator to estimate how a lower contribution rate could affect a simplified match. The actual plan formula, vesting schedule, and true-up policy still control.

Market opportunity cost is uncertain, not zero

Borrowed assets are usually sold inside the account. While the loan is outstanding, that amount is not invested in the funds it previously held. If markets rise, the participant misses some growth. If markets fall, being temporarily out of those assets may look favorable. Neither result is known when the loan begins.

A useful comparison uses several return assumptions rather than pretending there is one certain cost. For example, compare the account after five years under a low, middle, and high return assumption, then add each loan payment back on its actual date. Also test what happens if normal payroll contributions fall during repayment.

The phrase "you pay interest to yourself" describes where the interest goes. It does not measure missed returns, plan fees, a reduced employer match, or the risk that the loan later becomes taxable.

Leaving the job can change the schedule

A job departure does not produce one universal outcome. Some plans let former employees continue making scheduled payments. Others require faster repayment or offset the unpaid balance against the participant's account after the plan's stated deadline.

A plan loan offset is an actual distribution used to satisfy the debt. It is different from a deemed distribution caused by a repayment failure, and the rollover rules differ. The IRS retirement plan loan FAQ explains that certain qualified plan loan offsets caused by severance from employment or plan termination can receive an extended rollover period, generally through the federal income-tax return due date, including extensions, for that tax year.

That rollover requires outside money equal to the eligible offset amount. The plan has already used part of the account to clear the loan, so there is no loan check waiting to be deposited elsewhere. If the participant cannot replace the amount, the taxable portion remains a distribution.

Anyone comparing a loan should read the plan's job-separation provision before borrowing. Check whether the current paycheck covers the payment and whether repayment would still work after a layoff, resignation, or move to another employer.

A missed payment may turn the balance into taxable income

When a participant fails to repay under the loan terms, the outstanding amount may become a deemed distribution. It is generally included in taxable income, and an additional 10% tax may apply when the participant is under age 59½ unless an exception applies.

A deemed distribution is not the same as a normal cash withdrawal. The participant may owe tax without receiving new cash at the time of default. The loan can also remain an obligation under the plan even after the tax event, depending on plan administration and the rules described in the federal regulation.

Plans may allow a short cure period after a missed installment, but the regulation limits how long that period can run. Payroll problems should be raised with the plan administrator quickly rather than left until tax filing season.

Compare the loan with the problem it is meant to solve

The fairest comparison uses the same dollar amount and payoff period for each option. Record:

1. The 401(k) loan payment, rate, term, and plan fees. 2. Any change to regular contributions and employer matching. 3. A range of foregone investment returns rather than one promised return. 4. The repayment rule after leaving the employer. 5. The tax cost if the unpaid balance becomes a distribution. 6. The rate, fees, and protections on any non-retirement alternative.

A 401(k) loan can replace high-interest debt or cover a short cash need without a credit check, but that does not make it automatically cheaper. It moves risk into a retirement account and ties the repayment process to an employer's plan.

The site's 2026 401(k) contribution-limits guide explains how employee deferrals, catch-up contributions, and employer money use different limits. A loan does not create extra contribution room, and repayments are not a substitute for ordinary contributions.

Browse the Economy section for more retirement, tax, inflation, and interest-rate guides.

Educational only. This article provides general information and simplified examples. It is not personalized financial, retirement, tax, legal, credit, or investment advice.

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