Using a 401(k) loan to pay off debt
A 401(k) loan borrows from your own retirement savings and pays the interest back to you. The limits and the risks come from IRS rules.
A 401(k) loan needs no credit check, and the interest goes back into your account. The cost is the growth that money misses while it is out.
Here are the IRS rules and how it compares with a debt consolidation loan.
How much you can borrow
The most a plan can lend is the greater of $10,000 or 50% of your vested balance, capped at $50,000 (IRS). With $40,000 vested, the most is $20,000.
Not every plan offers loans. Your plan’s own terms decide the rate and the fees.
The repayment rules
You must repay within 5 years, in roughly equal payments made at least every quarter (IRS). Most plans take them from your paycheck.
Leaving your job can make the balance due much sooner. Ask your plan what happens before you borrow.
What happens if you cannot repay
A loan in default is generally treated as a taxable distribution of the whole unpaid balance (IRS). Under age 59½ an extra tax can apply.
So a missed stretch of payments can turn card debt into a tax bill.
401(k) loan vs debt consolidation loan
The table compares the two on $20,000.
| On $20,000 | Consolidation loan | 401(k) loan |
|---|---|---|
| Credit check | Yes | No |
| Rate | Set by the lender; 11.9% bank average | Set by your plan; the interest goes back to your account |
| Longest term | Up to 7 years at some lenders | 5 years |
| If you leave your job | No change | The balance can come due sooner |
| If you stop paying | Late fees and a hit to your credit | Taxed as a distribution, plus a possible extra tax |
| Hidden cost | Origination fee at some lenders | Growth your savings miss while the money is out |
When it makes sense
It fits a secure job, a short payoff and credit too weak for a fair loan rate. It is a poor fit if your job may change or you may stop the payments.
Run the loan side on the debt consolidation calculator, then decide.
Related topics
- Loan vs balance transfer
- Does it hurt your credit?
- Debt management plan
- Debt consolidation loan calculator
Before you borrow
Is it a good idea to take a 401(k) loan to pay off debt?
Sometimes, with a secure job and a short payoff. The risk is a tax bill if you cannot repay.
How much can I borrow from my 401(k)?
The greater of $10,000 or half your vested balance, up to $50,000, if your plan allows loans.
Does a 401(k) loan show on my credit report?
A plan loan is not credit from a lender, so it does not need a credit check.
Compare a 401(k) loan with a real offer
You could borrow from your retirement or from a lender. A lender’s offer may cost less than you think once the growth is counted. Call and a specialist checks what a lender would offer you first.