401(k) Loan
What Is a 401(k) Loan?
A 401(k) loan allows participants in certain employer-sponsored retirement plans to borrow money from their retirement account balance. The borrowed funds must generally be repaid with interest within a specified time period.
Unlike withdrawals, 401(k) loans allow individuals to access funds without immediately triggering taxes or penalties if repayment rules are followed.
Why It Matters
A 401(k) loan can provide access to funds during financial emergencies or major expenses. Because the loan is taken from the participant’s own retirement savings, interest payments are typically paid back into the account.
However, borrowing from retirement savings can reduce long-term investment growth.
How a 401(k) Loan Works
Participants may borrow a portion of their account balance subject to plan rules.
Typical features include:
- borrowing limits set by the retirement plan
- repayment through payroll deductions
- interest paid back into the account
- fixed repayment schedules
If the loan is not repaid according to plan rules, the outstanding amount may be treated as a taxable distribution.
401(k) Loan vs Hardship Withdrawal
- A 401(k) loan must be repaid.
- A hardship withdrawal permanently removes funds from the account.
FAQs About 401(k) Loans
Do all 401(k) plans allow loans?
Loan availability depends on the employer’s retirement plan rules.
Is interest charged on the loan?
Yes, but interest is typically paid back into the participant’s account.
What happens if the loan is not repaid?
The remaining balance may be treated as a taxable withdrawal.
Related Terms
