401k401(k) Loans
A loan from your own 401(k) isn't taxed like a withdrawal — unless you fail to repay it on schedule, at which point it can convert into one.
Reviewed January 2026 against current IRS guidance.
How much you can borrow
If your plan allows loans (not all do), you can generally borrow up to the lesser of 50% of your vested account balance or $50,000. If your vested balance is small, plans are permitted to allow loans up to $10,000 even if that exceeds 50% of the balance. The exact terms, interest rate, and whether loans are offered at all are set by your specific plan document, not by a single universal rule.
Why a 401(k) loan generally isn't taxed
A properly structured 401(k) loan is not treated as a taxable distribution because you're contractually obligated to repay it, with interest, back into your own account. The interest you pay goes back into your own 401(k) balance, not to a bank — though it's still an out-of-pocket cost since you're paying it with after-tax dollars.
Repayment terms
- Loans generally must be repaid within five years, usually through payroll deduction.
- An exception allows a longer repayment period if the loan is used to buy your primary residence.
- Payments must be made at least quarterly and in substantially level amounts.
What happens if you leave your job with an outstanding loan
If you leave your job before repaying a 401(k) loan in full, the unpaid balance is generally treated as a taxable distribution unless you pay it off by your federal tax filing deadline for that year (including extensions).
This is sometimes called a "loan offset." Before a 2018 tax law change, the repayment window after leaving a job was much shorter (typically 60 days); it was extended to the tax filing deadline, which gives departing employees meaningfully more time to either repay the loan or roll over an equivalent amount into an IRA or new employer plan to avoid the distribution being taxed.
If you default while still employed
Missing scheduled loan payments (beyond a permitted cure period, typically through the end of the following calendar quarter) causes the outstanding balance to be "deemed" distributed — it becomes taxable income immediately, and the 10% early withdrawal penalty can apply if you're under 59½ and no exception fits, even though you're still employed and the loan technically still exists as a debt to the plan.
The opportunity cost that isn't a “tax” but matters anyway
Money borrowed from a 401(k) isn't invested in the market while the loan is outstanding, and you're repaying it with after-tax dollars that will be taxed again when eventually withdrawn in retirement (for the traditional portion). This isn't a tax law point, but it's the most common financial trade-off people overlook when comparing a 401(k) loan to other borrowing options.