Borrowing From Your 401(k): How 401(k) Loans Work and What They Cost

Short answer: Borrowing from your 401(k) is allowed only if your plan offers loans. Under IRS rules, you can generally borrow the lesser of $50,000 or 50% of your vested balance and must repay it within 5 years, with payments at least quarterly. A loan that follows the rules isn't taxed, but if you miss payments or leave your job without repaying, the unpaid balance can be taxed as a distribution, plus a 10% additional tax if you're under 59½.

Can You Borrow From Your 401(k)?

Maybe. The IRS says 401(k), 403(b), 457(b), profit-sharing and money purchase plans may offer loans, but employers aren't required to include them. Your plan can also set its own limits on how much you can borrow and how often.

You don't need a hardship to qualify. According to the IRS, a plan loan doesn't depend on why you want the money or whether you could borrow somewhere else.

IRAs are different. IRAs and IRA-based plans, including SEP-IRAs, SIMPLE IRAs and SARSEPs, can't offer loans at all. The IRS warns that borrowing from an IRA, or pledging part of it as collateral, can make the IRA (or the pledged part) taxable.

How Much Can You Borrow From a 401(k)?

Under IRS rules (as of 2026), the maximum is the lesser of:

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

There's one exception: if half your vested balance is less than $10,000, some plans let you borrow up to $10,000. Plans aren't required to include this exception.

Your vested balance	IRS maximum loan
$40,000	$20,000 (50% of the balance)
$80,000	$40,000 (50% of the balance)
$120,000	$50,000 (the dollar cap)

The examples above come from the IRS. Only your vested balance counts. Our guide to how much to contribute to your 401(k) explains how vesting schedules work.

What If You Already Have a 401(k) Loan?

A plan may let you have more than one loan, but all your loans together can't go over the limit. The $50,000 cap is also reduced by the difference between your highest loan balance in the past 12 months and your current balance.

The IRS gives this example. Jim has an $80,000 vested balance and owes $18,000 on a $27,000 loan he took eight months ago. His total limit is the lesser of $41,000 ($50,000 minus the $9,000 he has paid down) or $40,000 (half his balance). With $18,000 still owed, he can take a second loan of up to $22,000, if his plan allows a second loan.

How Do You Borrow From Your 401(k)?

The exact steps depend on your plan, but the process usually looks like this:

1. Check whether your plan offers loans. Your plan documents or plan administrator can tell you, along with any limits on the amount, the number of loans and the purpose.
2. Find your vested balance. Use it to work out the most you could borrow under the limits above.
3. Ask about spousal consent. Some plans require your spouse's written consent, for example for loans over $5,000.
4. Review the repayment terms. Your plan must spell out its loan procedures and repayment terms, and its terms decide how a missed payment is handled.
5. Plan for a job change. Ask what happens to the loan if you leave your employer, since your plan may require you to repay it in full.

How Do You Repay a 401(k) Loan?

Under IRS rules, a plan loan generally must be repaid within 5 years in substantially equal payments of principal and interest, made at least quarterly. A loan used to buy your principal residence can have a longer repayment term.

Loan repayments aren't plan contributions, so paying back a loan doesn't count toward your 401(k) contribution limit for 2026.

Two situations can pause repayment:

• Military service. Your employer may suspend repayments while you're on active duty and extend the loan by the same length of time.
• Leave of absence. A plan may suspend repayments for up to a year during a leave of absence with reduced pay. The loan isn't extended, so you'll need to make up the missed payments when you return, through larger payments or a lump sum.

What Happens If You Can't Pay Back a 401(k) Loan?

If you don't repay the loan on its terms, the unpaid balance is generally treated as a distribution, which the IRS calls a "deemed distribution." That has two tax effects:

• You generally must include the previously untaxed part in your gross income for that year.
• You may owe an extra 10% tax on the taxable amount unless you're at least 59½ or another exception applies.

Your plan's terms decide how a missed payment is handled. A plan may give you until the end of the next calendar quarter to catch up. In the IRS example, a payment missed in June leads to a deemed distribution at the end of September.

A deemed distribution can't be rolled over to another plan or an IRA. You can still make the missed payments later, and those late repayments add to your tax basis. And as the IRS points out, any loan balance you don't repay leaves you with less saved for retirement.

What Happens to Your 401(k) Loan If You Leave Your Job?

Your plan may require you to repay the full balance if you leave your job or the plan ends. If you can't, the unpaid balance is treated as a distribution and reported to you on Form 1099-R.

In that case the plan usually reduces your account by the amount you owe, which the IRS calls a "plan loan offset." Unlike a deemed distribution, an offset can be rolled over. When the offset happens because you left your job or the plan ended, you have until the due date of your federal tax return for that year, including extensions, to roll the amount over to an IRA or another eligible plan. Rolling it over lets you avoid immediate income tax on that amount.

Is a 401(k) Loan Better Than a Hardship Withdrawal?

They work very differently. A loan is meant to be paid back. A hardship distribution is a withdrawal you keep.

	401(k) loan	Hardship distribution
Does the plan have to offer it?	No	No
Do you need a financial need?	No	Yes, an "immediate and heavy" need
How much?	Lesser of $50,000 or 50% of vested balance	Only the amount needed, including taxes
Paid back?	Yes, generally within 5 years	Can't be repaid to the plan
Taxed?	Not if you follow the loan rules	Generally yes, except Roth contributions
10% additional tax?	Only if it becomes a distribution and no exception applies	May apply
Can it be rolled over?	A plan loan offset can be	No

Under IRS rules, certain needs automatically count as immediate and heavy for a hardship distribution. They include medical care, costs to buy your principal residence, the next 12 months of college tuition and fees, payments to prevent eviction or foreclosure, funeral expenses and certain home repairs. Consumer purchases, such as a boat or a television, generally don't qualify.

If you're thinking about a regular early withdrawal instead, the IRS lists exceptions to the 10% additional tax for plans like 401(k)s. They include leaving your employer after you reach age 55, total and permanent disability, terminal illness, qualified birth or adoption distributions of up to $5,000, and certain personal or family emergency expense distributions.

Questions to Ask Before You Borrow

A 401(k) loan is still a loan against your retirement. Before you sign, ask yourself:

• How secure is my job? If you might leave or be laid off, could you repay the full balance, or roll it over by your tax deadline?
• Can I afford the payments? Missed payments can turn the loan into taxable income and, if you're under 59½, an extra 10% tax.
• Does my spouse need to sign? Some plans require it.
• What does the plan charge? Ask the plan administrator about interest, fees and how the loan affects your investments while it's outstanding.
• Is there another way? Compare the loan with other options before you tap savings meant for retirement.

The Bottom Line

Borrowing from your 401(k) is possible only if your plan allows it, and the IRS limits most loans to $50,000 or half your vested balance, repaid within 5 years. Follow the repayment schedule and the loan isn't taxed. Miss payments or leave your job without a plan, and the balance can become taxable income with a possible 10% additional tax. Our retirement savings calculator can help you see how your savings are tracking. If you have a 403(b) rather than a 401(k), our guide to 401(k) vs. 403(b) plans explains the differences, and a fee-only fiduciary adviser can help you weigh the trade-offs; our guide to what a financial adviser costs explains how they're paid.

Frequently asked questions

How much can I borrow from my 401(k)?

If your plan offers loans, the IRS limit is generally the lesser of $50,000 or 50% of your vested account balance. Some plans let you borrow up to $10,000 even when half your vested balance is less than that, but plans don't have to include this exception. Your plan can also set a lower limit.

How long do I have to pay back a 401(k) loan?

Generally 5 years, in substantially equal payments of principal and interest made at least quarterly. A loan used to buy your principal residence can have a longer term.

What happens to my 401(k) loan if I quit or lose my job?

Your plan may require you to repay the full balance. If you don't, the unpaid amount is treated as a distribution. You can avoid immediate income tax by rolling that amount over to an IRA or another eligible plan by your tax return due date for that year, including extensions.

Is a 401(k) loan taxable?

Not if it follows the plan loan rules on amount, length and repayment. A loan that isn't repaid on its terms is generally taxed as a distribution, and the 10% additional tax may apply if you're under 59½ and no exception applies.

Can I borrow from an IRA instead?

No. IRAs, SEP-IRAs and SIMPLE IRAs can't offer loans. Under IRS rules, borrowing from an IRA can make the whole IRA taxable.

Sources

1. IRS: Retirement Topics - Plan Loans
2. IRS: Retirement Plans FAQs Regarding Loans
3. IRS: Considering a Loan From Your 401(k) Plan?
4. IRS: Retirement Topics - Hardship Distributions
5. IRS: Topic No. 558, Additional Tax on Early Distributions From Retirement Plans Other Than IRAs

This guide is general information, not personal advice. Your situation may differ, so consider talking with a qualified professional, such as a fiduciary financial adviser, CPA or licensed agent, before making a decision.