How Can I Borrow From My 401(k)?

By
Puja Kumari
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Borrowing from your 401(k) can provide quick access to cash, but it comes with strict rules and potential long-term consequences. Below is a fully updated (as of November 2025) guide for U.S. readers on how can I borrow from my 401(k) — covering loan limits, repayment terms, plan requirements, and important considerations before you decide.

What Does It Mean to Borrow From Your 401(k)?

When you ask how can I borrow from my 401(k), it refers to taking a loan from your employer-sponsored retirement plan rather than making a permanent withdrawal. If your plan allows it, you borrow funds from your own vested account balance and repay it—plus interest—back into the same account.

This is different from a withdrawal, where you permanently remove the money, often paying taxes and penalties. A 401(k) loan is essentially borrowing from yourself, with interest payments returning to your retirement savings.

Who Is Eligible and What Should You Check First?

Before borrowing, you need to confirm a few things:

  • Plan Permission: Not every employer’s plan allows loans. Check with your plan administrator or your Summary Plan Description (SPD).
  • Vested Balance: You can only borrow against the vested portion of your 401(k)—the amount you fully own.
  • Plan Restrictions: Employers can set their own limits, such as minimum or maximum loan amounts and the number of loans allowed at one time.

Always confirm your plan’s rules before applying.

How Much Can You Borrow?

The IRS sets strict limits on 401(k) loans. As of 2025, you may borrow the lesser of:

  • 50% of your vested account balance, or
  • $50,000 total.

If 50% of your vested balance is less than $10,000, your plan may allow you to borrow up to $10,000 instead.

For example, if your vested balance is $80,000, the maximum loan you can take is $40,000. But if you have only $15,000 vested, you might be able to borrow up to $10,000—depending on your plan’s terms.

Keep in mind: employers can impose stricter limits even within these federal guidelines.

What Are the Repayment Terms and Requirements?

When you borrow from your 401(k), repayment is mandatory to avoid tax consequences. Here are the general rules:

  • Repayment Period: Most loans must be repaid within five years.
  • Primary Residence Loans: If you use the loan to buy your main home, your plan may allow a longer repayment period.
  • Payment Schedule: Repayments are made in equal installments (principal and interest) at least quarterly, often through payroll deductions.
  • Interest: The interest rate is typically based on the prime rate plus one or two percentage points. You pay the interest to yourself, not to a lender.
  • Leaving Your Job: If you leave your employer, any remaining loan balance usually becomes due right away. If not repaid within a short time frame, the unpaid amount is treated as a taxable distribution and may be subject to a 10% early withdrawal penalty if you’re under age 59½.

How to Borrow From Your 401(k): Step-by-Step

If you’ve confirmed that your plan allows loans, here’s how to proceed:

  1. Review Your Plan: Read your Summary Plan Description or contact your plan administrator to confirm eligibility and limits.
  2. Calculate Your Maximum Loan: Determine how much you can borrow under the 50% or $50,000 rule.
  3. Submit the Application: Complete the loan request through your plan provider’s website or HR department. You’ll specify the amount, repayment term, and payment method.
  4. Receive the Funds: Once approved, the funds are usually distributed by check or direct deposit, typically within a few business days.
  5. Repay the Loan: Repay through payroll deductions or other arrangements set by your plan. Stay on track to avoid default.
  6. Track Your Balance: Regularly monitor your repayment progress and ensure you stay compliant with your plan’s schedule.

Benefits and Drawbacks of Borrowing From a 401(k)

Benefits:

  • No credit check required since you’re borrowing from yourself.
  • Interest payments go back into your 401(k), increasing your own account balance.
  • If repaid on time, the loan is not considered a taxable event.
  • May provide faster access to funds compared to traditional loans.

Drawbacks:

  • You miss out on investment growth while the borrowed amount is out of your account.
  • Repayments are made with after-tax dollars, and the money is taxed again when you eventually withdraw it in retirement.
  • If you leave your job, the outstanding balance is due immediately, or it will be treated as taxable income.
  • Some employers suspend contributions or matching while a loan is active.

Recent Updates for 2025

In 2025, the general 401(k) loan rules remain unchanged:

  • The 50% or $50,000 limit still applies.
  • Loans must still be repaid within five years (unless for a primary residence).
  • Employers must continue to follow written procedures for administering loans.

However, the SECURE 2.0 Act has made some administrative changes to retirement plan management, improving flexibility in how plans handle repayment and hardship provisions. While not directly changing loan limits, these updates streamline some processes for employers and employees alike.

When Borrowing From a 401(k) Might Make Sense

You might consider borrowing from your 401(k) if:

  • You have a short-term financial emergency and few other borrowing options.
  • Your employment is stable, and you’re confident you can make regular repayments.
  • The loan amount is relatively small and won’t significantly reduce your long-term retirement growth.

However, it’s not recommended if:

  • You plan to change jobs soon.
  • You’re using the funds for nonessential spending.
  • You have access to lower-cost borrowing alternatives like a home equity loan or personal loan.

FAQs: Common Questions About 401(k) Loans

Q: Can I borrow from my 401(k) without paying taxes or penalties?
A: Yes, if the loan follows IRS rules and you repay it on time. It’s only taxed if you default or fail to repay.

Q: What happens if I can’t repay the loan?
A: Any unpaid balance is treated as a distribution, taxed as ordinary income, and possibly subject to a 10% penalty if you’re under 59½.

Q: Is borrowing from a 401(k) better than withdrawing money?
A: Usually yes. A loan doesn’t trigger taxes or penalties if repaid. Withdrawals are permanent and taxable.

Q: Can I have more than one loan at a time?
A: Some plans allow multiple loans, but most limit you to one active loan. Check your plan’s terms.

Q: Can I borrow more than $50,000?
A: No. Federal law caps loans at $50,000 or 50% of your vested balance, whichever is less.

Key Takeaways

If you’re wondering how can I borrow from my 401(k), remember these essential points:

  • Confirm your plan allows loans and know your vested balance.
  • You can borrow up to 50% of your vested account balance or $50,000.
  • Repay the loan within five years (unless for a home purchase).
  • Missing payments or leaving your job may cause your loan to become taxable.
  • Always weigh short-term needs against long-term retirement goals.

Borrowing from your 401(k) can be a practical solution in certain situations — but it’s best to proceed only after considering the long-term impact on your retirement savings.

What are your thoughts on using your 401(k) as a loan option? Share your experiences and opinions below!

Disclaimer:
This article is for informational purposes only and does not constitute financial, tax, or legal advice. Always consult a qualified financial advisor or tax professional before making any decisions about your 401(k).