What are the pros and cons of a 401(k) loan?

A 401(k) loan lets you borrow from your own retirement savings without a credit check, but the opportunity cost of missing market growth, the double taxation on repayment, and the full-balance tax hit if you leave your job before repayment can make it an expensive option.

A 401(k) loan allows you to borrow from your own employer-sponsored retirement account — typically up to 50% of your vested balance or $50,000, whichever is less — and repay it with interest over up to five years (longer for home purchases). The IRS rules on 401(k) loans require repayment on a fixed schedule; if you miss payments or leave your job, the outstanding balance can be treated as a taxable distribution, subject to income tax plus a 10% early withdrawal penalty if you're under 59½.

Pros

No credit check — the loan is from your own account, so approval doesn't depend on your credit score or credit history.
Interest goes back to you — you pay interest on the loan, but that interest is credited back to your own 401(k) account (you're paying yourself).
Low and fixed rate — most plans charge prime rate plus 1–2%, which is typically lower than credit card or personal loan rates.
No tax on the borrowed amount — the loan proceeds are not taxable income (unlike an early withdrawal).
Fast access — most plans can disburse within days of approval, without the underwriting delay of a traditional loan.

Cons

Opportunity cost of missing market growth — borrowed funds are out of the market during the loan period. If the market grows, you miss those gains.
Double taxation on repayment — you repay the loan with after-tax dollars, and those repaid dollars will be taxed again when you withdraw them in retirement, per IRS guidance.
Job-change risk — if you leave your employer (voluntarily or not), most plans require full repayment within 60–90 days, or the outstanding balance is treated as a distribution and taxed accordingly.
Reduces retirement savings — any period out of the market compresses the compounding growth that makes retirement accounts powerful over 20–30 year horizons.
May reduce contributions — some employees reduce new contributions while repaying the loan, compounding the retirement shortfall.
10% early withdrawal penalty — if the loan defaults (e.g., you can't repay after leaving a job and don't roll it over), the balance becomes a taxable distribution plus a 10% penalty if you're under 59½.

Leaving your job while carrying a 401(k) loan

If you leave your employer — voluntarily or through a layoff — while you have an outstanding 401(k) loan, most plans require full repayment within 60–90 days. If you can't repay, the balance is treated as a taxable distribution. Under 59½, that means income tax plus a 10% early withdrawal penalty. The SECURE 2.0 Act (2022) extended the rollover window to your tax filing deadline (including extensions) for loan offsets, but the risk of a large unexpected tax bill is real.

Who it fits / who should skip

A 401(k) loan may be a reasonable short-term bridge for people with no other low-rate borrowing option, a stable job with low risk of near-term termination, and a specific high-cost need (such as avoiding credit card default or a genuine emergency). It is a poor fit for people at risk of job loss, those who can qualify for a low-rate personal loan or 0% balance transfer, or anyone who would not maintain contributions through the repayment period.

Key limits

The maximum 401(k) loan is the lesser of 50% of the vested account balance or $50,000, per IRS rules. — IRS Retirement Topics — Loans, 2024
Loans not repaid on schedule — including after job separation — are treated as taxable distributions and subject to the 10% early withdrawal penalty for participants under age 59½. — IRS Retirement Topics — Loans, 2024

Key takeaways

No credit check, interest paid to yourself, and no tax on proceeds are real pros.
Opportunity cost, double taxation, and job-loss risk are the biggest cons.
Leaving your job while carrying a loan can trigger income tax plus a 10% early withdrawal penalty.
Best fit: stable employment, no other low-rate alternative, and a genuine short-term need.

Browse all answers
More answers to common questions about financing, banking, and credit.