How Can I Borrow from My 401(k)? A 2025 Guide for U.S. Workers

When you ask, “how can I borrow from my 401(k)?” you’re referring to the process of taking a loan from your employer-sponsored retirement plan. As of 2025, updated federal rules provide clear parameters and reminders for U.S. workers considering this option.

What Does Borrowing from a 401(k) Mean?

Borrowing from your 401(k) plan means taking money out of your own retirement account but treating it as a loan — you must repay it, with interest, under your plan’s terms. It’s not the same as an early withdrawal, where you permanently remove funds and face taxes and penalties.

Employers are not required to offer 401(k) loans, but many plans do. The IRS sets federal limits, while employers can add stricter rules.

How Much Can You Borrow?

Here are the key limits for 2025 when borrowing from your 401(k):

Keep in mind that your employer’s plan may impose stricter rules or deny loans altogether.

Repayment Terms and Other Rules

• Standard repayment period: Typically, you must repay the loan within five years, making payments that include both principal and interest.
• Home purchase exception: If you use the loan to buy your primary home, your plan may allow a longer repayment term.
• Leaving your job: If you leave or lose your job before you repay the loan, the remaining balance may be due in full. If you don’t repay it by your tax filing deadline, it becomes a taxable distribution.
• Default consequences: Failure to repay the loan on time turns the remaining balance into taxable income and may trigger a 10% early withdrawal penalty if you’re under age 59½.
• No credit check: These loans typically don’t require a credit check since you’re borrowing from your own savings.

Why Consider Borrowing from Your 401(k)?

Some workers choose this option because:

• You’re paying interest back to your own retirement account.
• The process is often faster and simpler than applying for a bank or personal loan.
• It doesn’t affect your credit score since it’s not reported to credit bureaus.

However, it’s important to weigh these benefits against potential downsides.

What Are the Risks and Costs?

Borrowing from your 401(k) has several drawbacks that can affect your long-term savings:

• Loss of investment growth: Money borrowed is temporarily removed from investments, which can limit potential growth during repayment.
• Reduced contributions: Many borrowers stop or reduce contributions while repaying the loan, missing out on employer matching and compounding returns.
• Risk during job change: If you lose or leave your job, you may have to repay the loan quickly, increasing the risk of default.
• No tax benefit: You pay loan interest with after-tax dollars, and the interest is not tax-deductible.
• Plan limitations: Not all plans allow loans, and some may restrict multiple loans or specific uses of borrowed funds.

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

1. Check your plan rules: Confirm whether your 401(k) allows loans and review its specific terms and conditions.
2. Determine the amount: Calculate how much you can borrow, based on the limits and your vested balance.
3. Submit a request: Complete the loan request through your employer or plan administrator.
4. Receive funds: Once approved, funds are usually deposited within a few days.
5. Repay the loan: Payments (including interest) are typically deducted from your paycheck.
6. Monitor your employment status: If you change jobs, confirm what happens to your loan balance and repayment schedule.

Alternatives to Borrowing from Your 401(k)

Before deciding, consider these other options:

• Personal loans or credit unions: May offer competitive rates without affecting your retirement.
• Home equity loan or line of credit: If you own property, you might qualify for a secured loan.
• Emergency savings: Using liquid funds avoids tampering with your retirement account.
• Hardship withdrawal: Available under specific conditions, though it results in taxes and possible penalties.

These alternatives may provide flexibility without reducing retirement assets.

Frequently Asked Questions

Q: Can I borrow from my 401(k) if I’m under 59½?
A: Yes. Borrowing is allowed at any age if your plan permits it, and it does not trigger an early withdrawal penalty as long as you repay it on time.

Q: What happens if I don’t repay the loan?
A: The remaining balance becomes a taxable distribution, and if you’re under 59½, you may also owe a 10% early withdrawal penalty.

Q: Is the loan interest tax-deductible?
A: No. You pay the loan interest back to yourself with after-tax dollars, and it’s not deductible.

Q: Can I take more than one 401(k) loan at a time?
A: Some plans allow multiple loans as long as the total amount doesn’t exceed IRS limits, but others allow only one at a time.

Q: How long do I have to repay if I leave my job?
A: You usually have until your next tax filing deadline to repay the loan or roll it into another eligible retirement plan to avoid taxes.

What’s New in 2025

• The maximum loan limits remain the same — up to 50% of your vested account balance or $50,000, whichever is lower.
• Financial experts continue to emphasize caution, especially for workers changing jobs, as unpaid loans often convert into taxable distributions.
• Many employers have updated online tools to help employees understand loan repayment schedules and potential impacts on long-term retirement savings.

Final Thoughts

Borrowing from your 401(k) can offer temporary financial relief, but it comes with long-term trade-offs. Before deciding how to borrow from your 401(k), review your plan’s terms, explore other financing options, and ensure you can stay on track with repayments.

If you’ve ever taken a 401(k) loan, share your experience or thoughts below — your insight could help others make informed decisions.