Should you take a 401(k) loan?

Borrowing from your own retirement account sounds like the cheapest loan there is: no credit check, a modest rate, and the interest goes back to you. Some of that is true. But the cost is not where the rate suggests, and the risk is not where most people look.

Whether you can, and how much

Not every plan lends. The IRS: "Retirement plans may offer loans to participants, but a plan sponsor is not required to include loan provisions in its plan." Your Summary Plan Description says whether yours does. IRAs cannot lend at all.

The limit is set by law. "The maximum amount a participant may borrow from his or her plan is 50% of his or her vested account balance or $50,000, whichever is less." If half your balance is under $10,000, the law lets a plan lend up to $10,000, but "Plans are not required to include this exception." Loans in the past year can lower the limit further.

Repayment has rules too. "Generally, the employee must repay a plan loan within five years and must make payments at least quarterly." There is one exception: "The law provides an exception to the 5-year requirement if the employee uses the loan to purchase a primary residence."

The real cost is missed growth

The interest you pay goes back into your own account, so the rate is not the cost. The cost is what the borrowed money would have earned had it stayed invested.

Take $10,000 from a $60,000 balance at a plan rate of 8.5%, repaid over five years: $205.17 a month, and $2,310 of interest paid in. If the money would have earned 7% a year, your account ends the five years $512 ahead of where it would have been, because the interest you paid in beat the growth. But you paid that $2,310 out of your own pocket. Net of the $512, the loan cost $1,798: the growth the money would have earned while it was out.

That figure moves with the market. In a year of strong returns, money outside the market misses them; in a year of losses, it misses those too. At a 10% return the same loan costs about $2,876. At 0% it costs nothing, because you only paid yourself.

The 401(k) loan calculator works this out on your numbers and sets it beside other ways to borrow.

What happens if you leave your job

This is the risk that matters most. "Plan sponsors may require an employee to repay the full outstanding balance of a loan if he or she terminates employment or if the plan is terminated." If you cannot, the unpaid balance is treated as a distribution and taxed. You can avoid that by putting the same amount into an IRA or other eligible plan "by the due date (including extensions) for filing the Federal income tax return for the year in which the loan is treated as a distribution."

If you do not, it is taxed like an early withdrawal. "You may also have to pay an additional 10% tax on the amount of the taxable distribution" unless you are at least 59½ or another exception applies. In the example, leaving after a year with $8,324 still owed, at age 41 with $70,000 of other income, single, in a 5% state: about $1,831 of federal tax, $416 of state tax and $832 of additional tax, $3,080 in all. The early withdrawal calculator taxes distributions the same way.

A job change is not always your choice. A layoff can turn a loan into a tax bill at the worst moment.

The double-taxation claim

You will hear that a 401(k) loan is taxed twice. It is partly true, and smaller than it sounds.

The repayments come from your paycheck after tax; the IRS notes that "Loan repayments are not plan contributions." For the principal, that is not double taxation: you received $10,000 untaxed and repay $10,000 of taxed money, which nets out, just as repaying any loan does.

The interest is different. In a traditional 401(k), the interest you pay in with after-tax money is taxed again when you withdraw it in retirement. That slice is taxed twice. On the example's $2,310 of interest at a 22% rate in retirement, it is about $500 of extra tax, paid when the money is withdrawn. Interest on any other loan is paid with after-tax money too, and is simply gone. In a Roth 401(k), qualified withdrawals are tax-free, so the second tax does not apply.

When another loan is better

Compare the 401(k) loan's real cost with the interest on the alternative.

• A credit card at 24% costs about $7,261 in interest on the same $10,000 over five years. The 401(k) loan is usually far cheaper.
• A HELOC at 8% costs about $2,166, a little more than the 401(k) loan's $1,798 in the example, but it does not depend on your job. It does put your home up as security. See whether a HELOC pays off debt.
• A personal loan at 12% costs about $3,347. See whether consolidating debt saves money.

A 401(k) loan suits a short-term need, a secure job, and a plan you are confident of repaying. It suits less well when your job is uncertain, when the repayments would push you to stop contributing (the missed contributions and any employer match can cost more than the loan), or when the money would cover spending that will recur. If what you have is high-rate debt, the snowball or avalanche calculator may show a way out without borrowing at all.

Sources: IRS, Retirement Topics: Loans, Retirement plans FAQs regarding loans and Considering a loan from your 401(k) plan? (each last reviewed 26 February 2026). 26 U.S.C. 72(p), loans treated as distributions. Figures computed with this site's own code.