401k Loan Rules: Limits, Interest Rates, Repayment, and Tax Consequences
Everything you need to know about borrowing from your 401k: how much you can borrow, interest rates, repayment rules, and what happens if you leave your job or default.
Quick Answer
401k loans allow you to borrow up to 50% of your vested balance or $50,000 (whichever is less) at interest rates of prime + 1-2%. You must repay within 5 years (longer for home purchases). If you leave your job, the loan typically becomes due within 60-90 days or becomes a taxable distribution. 401k loans have no credit check and don't affect your credit score.
Key Takeaways
- Maximum loan: 50% of vested balance or $50,000, whichever is less
- Interest rate: Typically prime rate + 1-2% (you pay yourself)
- Repayment period: 5 years (up to 30 years for home purchase)
- Job change risk: Loan becomes due within 60-90 days of leaving
- No credit impact: No credit check, not reported to credit bureaus
401k Loan Basics
A 401k loan allows you to borrow money from your own retirement account and pay it back with interest over time. Unlike a withdrawal, a loan keeps your money working for your retirement—you're essentially borrowing from yourself. Not all 401k plans offer loans, so check your plan documents first.
The main advantage of a 401k loan is that there's no credit check and the interest you pay goes back into your own account. However, there are significant risks, especially if you leave your job before repaying the loan.
401k Loan Limits
IRS rules set maximum limits on how much you can borrow from your 401k:
| Limit Type | Amount | Notes |
|---|---|---|
| Maximum Loan Amount | $50,000 or 50% of vested balance | Whichever is less |
| Minimum Loan | $1,000 typically | Plan-specific |
| Special Minimum | Up to $10,000 | If 50% of balance is less than $10,000 |
| Aggregate Limit | $50,000 | For all loans combined |
Calculating Your Maximum Loan
Example 1: $80,000 vested balance
- 50% of $80,000 = $40,000
- $50,000 limit
- Maximum loan: $40,000 (50% is less than $50,000)
Example 2: $150,000 vested balance
- 50% of $150,000 = $75,000
- $50,000 limit
- Maximum loan: $50,000 (capped at limit)
Example 3: $12,000 vested balance
- 50% of $12,000 = $6,000
- Special rule: May borrow up to $10,000 (if plan allows)
- Maximum loan: $10,000 (with special minimum)
Interest Rates and Costs
401k loan interest rates are typically set at the prime rate plus 1-2%. As of 2026, with the prime rate around 7.5-8.5%, this means rates of approximately 8.5-10.5%.
| Fee/Cost | Typical Amount | Who Receives |
|---|---|---|
| Interest Rate | Prime + 1-2% | You (back to your account) |
| Origination Fee | $50-$100 | Plan administrator |
| Annual Maintenance Fee | $25-$75 | Plan administrator |
| Opportunity Cost | Lost investment returns | N/A (reduced growth) |
💡 Key Point: You pay interest to yourself, not a bank. However, you're paying with after-tax dollars, and that interest will be taxed again when you withdraw in retirement. This creates a form of double taxation on the interest portion.
Repayment Rules
Standard Loans (5-Year Term)
- Must be repaid within 5 years
- Payments required at least quarterly
- Most plans set up automatic payroll deductions
- Payments include both principal and interest
Home Purchase Loans (Extended Term)
- May extend to 10-30 years if used for primary residence purchase
- Plan is not required to offer extended terms
- Documentation of home purchase may be required
- Only for purchasing, not refinancing
Payment Example
$20,000 loan at 9% interest for 5 years:
- Monthly payment: ~$415
- Total payments: $24,900
- Total interest paid: $4,900 (goes back to your account)
Leaving Your Job: The Biggest Risk
The most significant risk of 401k loans is what happens if you leave your job—whether voluntarily or not.
Traditional Rules (Pre-2018)
Historically, if you left your job with an outstanding 401k loan, you had to repay the entire balance within 60 days or it became a taxable distribution.
Current Rules (Tax Cuts and Jobs Act)
The Tax Cuts and Jobs Act of 2017 extended the repayment deadline for plan participants who leave their jobs. You now have until the due date of your tax return for the year you left your job (including extensions) to repay the loan or roll it over to a new qualified account.
| Scenario | Deadline | Consequence of Non-Payment |
|---|---|---|
| Leave job in 2026 | April 15, 2027 (or Oct 15 with extension) | Treated as distribution |
| Retire at 59½+ | Same as above | Treated as distribution (no penalty) |
| Transfer to new 401k | Varies by new plan | May roll over loan balance |
⚠️ Critical Warning: If you can't repay the loan by the deadline, the entire outstanding balance becomes taxable income. If you're under 59½, you'll also owe a 10% early withdrawal penalty. A $30,000 loan default could cost $10,000+ in taxes and penalties.
Default and Tax Consequences
What Constitutes Default?
- Missing payments for 90+ days (most plans)
- Leaving employment without arranging repayment
- Failing to repay by the tax deadline after leaving
Tax Consequences of Default
Example: $25,000 loan default at age 40
- Outstanding balance: $25,000
- Federal income tax (22% bracket): $5,500
- State income tax (5%): $1,250
- Early withdrawal penalty (10%): $2,500
- Total cost: $9,250
- Net loss: $25,000 from retirement + $9,250 in taxes/penalties
Multiple Loans and Refinancing
Multiple Loans
Some plans allow you to have multiple 401k loans simultaneously. The combined outstanding balance cannot exceed $50,000 or 50% of your vested balance. Each loan has its own repayment schedule.
Refinancing
Some plans allow you to refinance an existing loan or take a new loan to pay off an old one. This can extend the repayment period but doesn't increase the total amount you can borrow.
Pros and Cons Summary
✅ Pros
- • No credit check required
- • Interest goes to your account
- • Fast approval (5-7 days)
- • No impact on credit score
- • Use money for any purpose
- • Lower rates than some alternatives
❌ Cons
- • Repayment required if leave job
- • Taxes and penalties on default
- • Lost investment growth
- • Double taxation on interest
- • Reduces retirement savings
- • Fees can add up
When a 401k Loan Makes Sense
A 401k loan might be appropriate when:
- You have stable employment and won't be leaving soon
- You need money quickly and have no other options
- The interest rate is lower than alternatives
- You're consolidating high-interest debt
- You have a short-term need and can repay quickly
For a deeper analysis, see our 401k loan pros and cons guide.
Frequently Asked Questions
How much can I borrow from my 401k?
You can borrow up to 50% of your vested account balance or $50,000, whichever is less. Some plans allow a minimum of $10,000 even if 50% of your balance is lower. The limit applies to the total of all outstanding loans.
What is the interest rate on a 401k loan?
401k loan interest rates are typically the prime rate plus 1-2%. As of 2026, this usually ranges from 8.5% to 10.5%. The interest you pay goes back into your own 401k account, but you're paying yourself with after-tax dollars.
How long do I have to repay a 401k loan?
Standard 401k loans must be repaid within 5 years with at least quarterly payments. If you use the loan to purchase a primary residence, some plans allow repayment terms of 10-30 years. Check your specific plan rules.
What happens to my 401k loan if I leave my job?
If you leave your job voluntarily or involuntarily, you typically must repay the entire loan balance within 60-90 days. If you can't repay, the outstanding balance becomes a taxable distribution, subject to income tax and a 10% penalty if you're under 59½.
Does a 401k loan affect my credit score?
No, 401k loans do not appear on your credit report. There's no credit check to borrow, and missed payments won't affect your credit score. However, defaulting creates a taxable event, not a credit issue.
Can I have multiple 401k loans at the same time?
Some plans allow multiple loans, but the combined outstanding balance cannot exceed $50,000 or 50% of your vested balance, whichever is less. Each loan has its own repayment schedule and terms.
What can I use a 401k loan for?
Unlike hardship withdrawals, you can use a 401k loan for any purpose without justification. Common uses include debt consolidation, home purchase, home improvements, education expenses, medical bills, or emergency funds.
Are 401k loan payments tax-deductible?
No, 401k loan payments are made with after-tax dollars and are not tax-deductible. When you withdraw the money in retirement, you'll pay taxes on it again, resulting in double taxation on the interest portion.
What happens if I default on a 401k loan?
If you default (typically miss payments for 90+ days), the outstanding balance is treated as a distribution. You'll owe income taxes on the full amount, plus a 10% early withdrawal penalty if under 59½. The default is reported to the IRS on Form 1099-R.
Can I pay off a 401k loan early?
Yes, you can typically pay off a 401k loan early without penalty. Check with your plan administrator for any prepayment terms. Paying early saves on interest and reduces the risk of default if you leave your job.
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