By using this site, you agree to the Privacy Policy and Terms of Use.
Accept
ProbizbeaconProbizbeacon
  • Business
  • Investing
  • Money Management
  • Entrepreneur
  • Side Hustles
  • Banking
  • Mining
  • Retirement
Reading: Taking Out A 401(k) Loan: Benefits And Drawbacks
Share
Notification
ProbizbeaconProbizbeacon
Search
  • Business
  • Investing
  • Money Management
  • Entrepreneur
  • Side Hustles
  • Banking
  • Mining
  • Retirement
© 2025 All Rights reserved | Powered by Probizbeacon
Probizbeacon > Investing > Taking Out A 401(k) Loan: Benefits And Drawbacks
Investing

Taking Out A 401(k) Loan: Benefits And Drawbacks

April 8, 2025 10 Min Read
Share
10 Min Read
Taking Out A 401(k) Loan: Benefits And Drawbacks
SHARE

When you take out a loan from your 401(k) plan, you’ll get terms like you would with any other type of loan: There’s a repayment plan based on how much you borrow and the interest rate you lock in. According to IRS rules, you have five years to pay back the loan, unless the funds are used to buy your main home, in which case you have more time to repay.

Here are the pros and cons of taking out a 401(k) loan. 

Key takeaways

  • A 401(k) loan may help you access money from your retirement plan, but they’re not always available.
  • A 401(k) loan can help you avoid the costly expenses associated with taking an early withdrawal from your account.
  • You’ll need to pay back your 401(k) loan just as you would a regular loan.

Risks of taking out a 401(k) loan

The ability to take out a loan helps make a 401(k) plan one of the best retirement plans, but a loan has some key disadvantages. While you’ll pay yourself back, you’re still removing money from your retirement account that is growing tax-free. And the less money in your plan, the less money that grows over time. Even when you pay the money back, it has less time to fully grow.

In addition, if you have a traditional 401(k) plan, you’ll be repaying the pre-tax funds in the account with your after-tax earnings, so it takes even more time – in terms of working hours – to repay the loan.

Before deciding to borrow money from your 401(k), keep in mind that doing so has its drawbacks.

  • You may not get one. Having the option to get a 401(k) loan depends on your employer and the plan they have set up. A 2022 study from the Employee Benefit Research Institute and the Investment Company Institute says that 84 percent of plans had outstanding loans, based on 2020 data. So you may need to seek funds elsewhere.
  • You have limits. You might not be able to access as much cash as you need. The maximum loan amount is $50,000 or 50 percent of your vested account balance, whichever is less.
  • Old 401(k)s don’t count. If you’re planning on tapping into a 401(k) from a company you no longer work for, you’re out of luck. Unless you’ve rolled that money into your current 401(k) plan, you won’t be able to take a loan on it.
  • You could pay taxes and penalties on it. If you don’t repay your loan on time, the loan could turn into a distribution, which means you may end up paying taxes and bonus penalties on it.
  • You’ll have to pay it back more quickly if you leave your job. If you change jobs, quit or get fired by your current employer, you’ll have to repay your outstanding 401(k) balance sooner than five years. Under new tax law, 401(k) borrowers have until the due date of their federal income tax return to repay in such circumstances.
See also  25 Short Task Sites for Making Money From Home

For example, if you had a 401(k) loan balance and left your employer in January 2024, you’ll have until April 15, 2025, to repay the loan to avoid default and any tax penalty for the early withdrawal, according to The Retirement Plan Company. The old rule called for repayment within 60 days.

Advantages of borrowing from a 401(k)

Borrowing from your 401(k) isn’t ideal, but it does have some advantages, especially when compared to an early withdrawal.

  • Avoid taxes or penalties. A loan allows you to avoid paying the taxes and penalties that come with taking an early withdrawal. Additionally, the interest you pay on the loan will go back into your retirement account, although on a post-tax basis.
  • Dodge credit checks. A 401(k) loan also won’t require a credit check or be listed as debt on your credit report. If you’re forced to default on the loan, you won’t have to worry about it damaging your credit score because the default won’t be reported to credit bureaus.

When a 401(k) loan makes sense

Borrowing from your 401(k) should be a rare occurrence, but it can make sense in some circumstances:

  • You find yourself in need of a meaningful amount of cash in the short term. It shouldn’t be used for small amounts or on items that aren’t absolutely necessary.
  • A 401(k) loan is often a better financial choice than other short-term funding options such as a payday loan or even a personal loan. These other loan options typically come with high interest rates that make them less attractive. Plus, a 401(k) loan is relatively simple to arrange compared to applying for new loans with other financial institutions.
  • You have literally no other way to access cash. If friends and family can’t help you, a 401(k) may be your last resort. 
See also  Best Gold ETFs: Top Funds For Gold Investing

Early withdrawals vs. borrowing from your 401(k)

One alternative to a 401(k) loan is a hardship distribution as part of an early withdrawal, but that comes with all kinds of taxes and penalties. If you withdraw the funds before retirement age (59 ½) you’ll typically be hit with income taxes on any gains and may be assessed a 10 percent bonus penalty, depending on the nature of the hardship.

The IRS defines a hardship distribution as “an immediate and heavy financial need of the employee,” adding that the “amount must be necessary to satisfy the financial need.” This type of early withdrawal doesn’t require you to pay it back, nor does it come with any penalties.

A hardship distribution through an early withdrawal covers a few different circumstances, including:

  • Certain medical expenses
  • Some costs for buying a principal home
  • Tuition, fees and education expenses
  • Costs to prevent getting evicted or foreclosed
  • Funeral or burial expenses
  • Emergency home repairs for uninsured casualty losses

Hardships can be relative, and yours may not qualify you for an early withdrawal.

This type of withdrawal doesn’t require you to pay it back. But it’s a good idea to avoid an early withdrawal, if at all possible, because of the serious negative effects on your retirement funds.

Other alternatives to a 401(k) loan

Borrowing from yourself may be a simple option, but it’s probably not your only option. Here are a few other places to find money.

  • Use your savings. Your emergency cash or other savings can be crucial right now — and why you have emergency savings in the first place. Always try to find the best rate on a high-yield savings account so that you’re earning the highest amount on your funds.
  • Take out a personal loan. Personal loan terms could be easier for you to repay without having to jeopardize your retirement funds. Depending on your lender, you can get your money within a day or so, while 401(k) loans might not be as immediate.
  • Try a HELOC. A home equity line of credit, or HELOC, is a good option if you own your home and have enough equity to borrow against. You can take out what you need, when you need it, up to the limit you’re approved for. As revolving credit, it’s similar to a credit card — and the cash is there when you need it.
  • Get a home equity loan. This type of loan can usually get you a lower interest rate, but keep in mind that your home is used as collateral. This is an installment loan, not revolving credit like a HELOC, so it’s good if you know exactly how much you need and what it will be used for. While easier to get, make sure you can pay this loan back or risk going into default on your home.
See also  Crypto.com Review 2025 | Bankrate

FAQs

Bottom line

If taking money from your retirement is your only option, then a 401(k) loan may be right for you. However, try to find other funds first before tapping into this option. Depending on what you need and when you need it, you may have other choices that are better for your situation. Not having emergency or retirement savings are Americans’ biggest financial regrets.

You Might Also Like

How To Save $10,000 in a Year

£10,000 invested in the FTSE 250’s Kier Group 2 years ago is now worth…

Is today’s 15% jump in the Aston Martin share price the start of a stunning recovery?

How To Invest In Gold: 5 Ways To Buy And Sell It

44 Flexible Ways to Make Extra Money Online and Offline

TAGGED:InvestInvestingMoney
Share This Article
Facebook Twitter Copy Link
Previous Article Help Guide Students to College with a Class 101 Franchise Help Guide Students to College with a Class 101 Franchise
Next Article All 'The White Lotus' Actors Get Paid the Same Flat Rate All ‘The White Lotus’ Actors Get Paid the Same Flat Rate
Leave a comment Leave a comment

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Stay Connected

235.3kFollowersLike
69.1kFollowersFollow
11.6kFollowersPin
56.4kFollowersFollow
136kSubscribersSubscribe
4.4kFollowersFollow
- Advertisement -
Ad imageAd image

Latest News

How to Harness Prime Day Traffic Without Slashing Prices
How to Harness Prime Day Traffic Without Slashing Prices
Entrepreneur July 1, 2025
Tesla’s Sales Get Another Black Eye — But Will A New Model Y Solve Things?
Tesla’s Sales Get Another Black Eye — But Will A New Model Y Solve Things?
Investing July 1, 2025
NASA, Netflix Team Up to Live Stream Rocket Launches
NASA, Netflix Team Up to Live Stream Rocket Launches
Business July 1, 2025
The Federal Reserve’s Latest Dot Plot, Explained – And What It Says About Interest Rate Cuts
The Federal Reserve’s Latest Dot Plot, Explained – And What It Says About Interest Rate Cuts
Banking July 1, 2025
probizbeacon probizbeacon
probizbeacon probizbeacon

We are dedicated to providing accurate, timely, and in-depth coverage of financial trends, empowering professionals, entrepreneurs, and investors to make informed decisions..

Editor's Picks

How Much Can You Borrow With A Startup Loan?
How a Smashed Window Actually Helped His Business
Up 20% in a week! This growth stock is on fire – should I consider buying it?
23 Best Jobs for 18 Year Olds To Make Money

Follow Us on Socials

We use social media to react to breaking news, update supporters and share information

Facebook Twitter Telegram
  • About Us
  • Contact Us
  • Disclaimer
  • Privacy Policy
  • Terms of Service
Reading: Taking Out A 401(k) Loan: Benefits And Drawbacks
Share
© 2025 All Rights reserved | Powered by Probizbeacon
Welcome Back!

Sign in to your account

Lost your password?