To get a loan from your 401(k), you’ll submit a request through your plan administrator, typically online through your retirement account portal. Not every 401(k) plan allows loans, so the first step is confirming yours does. If it does, the process is straightforward: you borrow from your own balance, pay yourself back with interest through payroll deductions, and your retirement savings stay mostly intact as long as you follow the repayment schedule.
Check Whether Your Plan Allows Loans
Federal law permits 401(k) plans to offer loans, but it doesn’t require them to. Your employer decides whether to include a loan provision. To find out, log into your retirement account website (run by a provider like Fidelity, Vanguard, Schwab, or Empower), check the loan section, or review your plan’s Summary Plan Description. You can also call the number on your account statement and ask directly.
If your plan does allow loans, you’ll want to review the specific terms before applying. Plans vary on the minimum loan amount, the maximum number of outstanding loans you can carry at once, the interest rate, and whether your spouse needs to sign off. Some plans require written spousal consent for any loan above $5,000.
How Much You Can Borrow
The IRS caps 401(k) loans at the lesser of $50,000 or 50% of your vested account balance. “Vested” means the portion of the account you fully own. Your own contributions are always 100% vested, but employer matching contributions may vest over a schedule of several years. If your vested balance is $80,000, for example, you could borrow up to $40,000 (50%). If your vested balance is $200,000, you’d hit the $50,000 cap.
Your plan may also set its own lower maximum or require a minimum loan amount, so the IRS ceiling is just the upper boundary.
How to Apply
Most plan providers have moved the loan application entirely online. Here’s what the process typically looks like:
- Log into your retirement account. Navigate to the loans or withdrawals section. Many providers label it “Take a Loan” or “Request a Loan.”
- Choose your loan amount and repayment term. You’ll see the maximum you’re eligible for and can select a shorter or longer repayment period, up to five years (longer if the loan is for purchasing a primary home).
- Review the interest rate and repayment schedule. The rate is usually set at one or two percentage points above the prime rate. Repayments are made through automatic payroll deductions, so you’ll see exactly how much comes out of each paycheck.
- Provide spousal consent if required. If your plan requires it and your loan exceeds $5,000, your spouse may need to sign a consent form.
- Submit and receive funds. Approval is generally fast since you’re borrowing your own money, not going through a credit check. Funds typically arrive via direct deposit or check within a few business days.
Administrative fees are usually low. Some plans charge a small origination or maintenance fee, but these are far less than what you’d pay for a personal loan or credit card balance.
How Repayment Works
You repay the loan in substantially equal payments, at least quarterly, over a term of up to five years. Most plans deduct payments directly from your paycheck, so you never have to remember to make a payment. The interest you pay goes back into your own 401(k) account, not to a bank.
That sounds like a great deal, but there’s a hidden cost. The money you borrowed isn’t invested in the market while you’re paying it back. If your investments would have earned 8% during that period and your loan rate is 6%, you’ve lost that 2% spread on the borrowed amount. Over several years, the missed growth can add up to thousands of dollars in retirement savings you won’t recover.
What Happens If You Leave Your Job
This is the biggest risk of a 401(k) loan. If you quit, get laid off, or are fired while you still have an outstanding loan balance, the remaining amount typically becomes due much sooner than the original five-year window. Many plans require full repayment within 60 to 90 days of leaving employment, though the exact timeline depends on your plan’s rules.
If you can’t pay it back, the unpaid balance is treated as a “loan offset,” which is essentially a distribution from your retirement account. You’ll owe income tax on that amount for the year it happened. And if you’re under 59½, you’ll also owe a 10% early withdrawal penalty on top of the taxes. On a $20,000 unpaid balance, a borrower in the 22% tax bracket would face roughly $6,400 in taxes and penalties.
There is one safety valve: you have until your tax filing deadline for that year, including extensions, to roll the offset amount into an IRA or another eligible retirement account. If you manage to come up with the cash and complete the rollover in time, you avoid the tax hit entirely.
Interest Rates and the True Cost
The interest rate on a 401(k) loan is typically the prime rate plus 1% to 2%. With a prime rate around 6.5% to 7.5%, that puts most 401(k) loan rates in the neighborhood of 7.5% to 9.5%, though this shifts as the prime rate changes. Because you’re paying interest to yourself rather than a lender, many people view this as “free” borrowing, but that framing ignores the opportunity cost of pulling money out of the market.
Consider this scenario: you borrow $15,000 at an 8% loan rate and repay it over five years. You’ll pay about $3,200 in interest, all of which returns to your account. But if the investments you sold to fund the loan would have grown at 9% annually, you missed out on roughly $8,100 in compounded growth over those five years. The net cost is the difference between the growth you missed and the interest you repaid, leaving you several thousand dollars behind where you’d otherwise be.
Alternatives Worth Knowing About
Recent changes to retirement law created a few new options that may work better depending on your situation. Starting in 2024, plans can allow emergency personal expense distributions of up to $1,000 per year without the 10% early withdrawal penalty. You can repay the withdrawal within three years, but you can’t take another emergency distribution during that repayment window unless you’ve paid it back. This option works for smaller, urgent needs without triggering a full loan.
Some employers now offer pension-linked emergency savings accounts. These are separate accounts funded with up to 3% of your salary, capped at $2,500 in employee contributions. You can withdraw from these accounts without the fees or penalties that come with tapping your main retirement balance, making them a built-in rainy-day fund.
If your need is larger, a home equity line of credit or a personal loan from a bank or credit union may be worth comparing. The interest on those isn’t going back to you, but your retirement savings stay invested and you don’t face the risk of an unexpected tax bill if you change jobs.
When a 401(k) Loan Makes Sense
A 401(k) loan works best when you need a moderate sum, you’re confident you’ll stay with your employer for the full repayment period, and you don’t have cheaper alternatives. It can be a reasonable way to cover a major expense like a medical bill or home repair while avoiding high-interest credit card debt. The approval is fast, there’s no credit check, and the interest stays in your account.
It works poorly if your job situation is uncertain, if you’re close to retirement and need every dollar compounding, or if borrowing would become a habit. Each loan chips away at the growth your future self is counting on, and the consequences of a default, especially the taxes and penalties, can turn what seemed like a convenient option into an expensive one.