401(k) loan

A plan loan can give you cash without permanently withdrawing that amount from retirement savings. Not every 401(k) plan offers loans, even when your account has a vested balance. The money borrowed is generally taken out of your selected investments, and paying interest back to your account does not guarantee you replace the growth those investments might have earned.

In a sentence

• "My 401(k) loan gives me $10,000 in cash, but it also creates a $10,000 repayment obligation."
• "A 401(k) loan has a repayment schedule, unlike a retirement withdrawal."
• "I need to check the plan's 401(k) loan terms before I leave my job."

How it works

1. Check whether your employer's plan permits loans and whether you qualify under its rules.
2. Find your vested balance, the amount that belongs to you under the plan's vesting rules. Borrowing restrictions can limit how much of that balance is available for a loan.
3. Read the loan agreement for the amount, interest rate, fees, repayment dates, and consequences of missed payments. The available loan amount is not a measure of what your household can afford to repay.
4. Repay principal and interest on the required schedule, and confirm how payments continue if your employment changes. Keep the repayment separate from any regular retirement contribution in your budget.

An example

Assume your plan permits a $10,000 loan, you keep all the proceeds in cash, and there are no fees, taxes, investment changes, or other assets or debts. The plan's reported $50,000 total after borrowing includes the $10,000 outstanding loan as a plan asset, rather than showing only the remaining investments.

Net worth = plan balance including the loan + cash − loan liability

The $10,000 cash increase does not create wealth because a matching liability offsets it. If a statement instead reports only the $40,000 invested balance, add the $10,000 loan asset before subtracting the loan liability; otherwise, the same loan reduces your calculated net worth twice.

Why it matters

Loan repayments reduce the cash available for household spending, even though principal and interest return to the plan. Compare the required payment with your budget, the loan's fees, and the effect of holding less in investments. Interest credited to your own account is paid from your own money, not earned from an outside borrower.

A loan can also connect a cash need today to your ability to keep up repayments after a job change. Treat the repayment conditions as part of the borrowing decision, not just the interest rate.

401(k) loan versus retirement withdrawal

A 401(k) loan carries an obligation to repay the plan, while a withdrawal from a 401(k) removes money without a loan repayment schedule. A loan that meets applicable requirements is generally not taxable when you receive it; a withdrawal's tax treatment depends on the type of money withdrawn and applicable rules. Both can leave less invested for retirement, but they have different repayment and tax consequences.

Common questions

What happens if I miss 401(k) loan repayments? An unpaid balance may be treated as a distribution if you fail to meet repayment requirements, with income tax on its taxable portion and a possible additional early-distribution tax. Contact the plan administrator about any opportunity to correct a missed payment rather than assuming one late payment has no consequence.

What happens to a 401(k) loan if I leave my job? The plan may allow continued payments or require repayment sooner. If the plan reduces your account balance to settle the loan, that is a loan offset, whose tax treatment and any rollover option depend on the circumstances and deadlines. Confirm the requirements with the administrator before relying on your existing payment arrangement.

Are loan repayments the same as retirement contributions? No. Loan repayments settle an existing obligation rather than make new retirement contributions. Keep the two separate when reading your paystub or deciding how much new saving your budget supports.

Go deeper

• How to count a 401(k) loan, a HELOC, or a car lease in net worth compares how three borrowing arrangements fit into a personal balance sheet.
• How to track a 401(k) or pension that doesn't connect covers keeping retirement balances current from statements.
• The Loan calculator estimates monthly payments and total interest from loan assumptions; confirm the actual repayment schedule with your plan.