Yes, you can borrow from your 401(k), but the rules are strict and the costs are real
Most 401(k) plans allow you to borrow against your own balance—typically up to 50% of what you have saved, with a maximum of $50,000. The IRS does not restrict what you use the money for, so a down payment is a legal use. You repay the loan to yourself over a set period, usually five years, and you pay interest on it. The catch: if you leave your job before the loan is repaid, you must pay back the full remaining balance within a short window—often 60 days—or the IRS treats it as an early withdrawal, which triggers taxes and a 10% penalty if you are under 59½.
This is different from a 401(k) withdrawal, where you take the money out permanently. A loan lets you keep the money working in your account (the portion you borrowed stops growing, but the rest continues), and you avoid the immediate tax hit. But it also means you are borrowing from your own retirement, which has long-term costs that a down payment loan from a bank does not.
Key Takeaways
- You can borrow up to 50% of your 401(k) balance, capped at $50,000, and repay it over five years with interest.
- If you leave your job before the loan is repaid, you must repay the full balance within 60 days or face taxes and a 10% penalty.
- The interest you pay goes back into your own account, but the borrowed portion stops growing while you are repaying it.
- A mortgage or home equity line of credit usually costs less and does not put your retirement at risk if your employment changes.
- Your plan administrator sets the interest rate, which is typically the prime rate plus 1 to 2 percentage points.
How a 401(k) loan works and what it costs
When you borrow from your 401(k), you are taking a loan against your own money. Your plan administrator (the company that manages your 401(k)) sets the terms: the interest rate, the repayment period, and any fees. The interest rate is usually the prime rate plus 1 to 2 percentage points—so if prime is 8%, you might pay 9% to 10%. That rate is fixed for the life of the loan.
You repay the loan through payroll deductions, which means the money comes out of your paycheck before taxes. This is one advantage: the repayment is automatic, and you cannot miss a payment. The interest you pay goes back into your 401(k) account, not to a bank. But the amount you borrowed—the principal—sits in a separate loan account and does not earn the investment returns that the rest of your balance does. If your 401(k) is invested in funds that average 7% annual growth, you are losing that growth on the borrowed amount while you repay it.
Most plans charge a loan origination fee (typically $50 to $100) and an annual maintenance fee (usually $25 to $50). These come out of your account or are added to the loan balance. Ask your plan administrator for the exact rate and fees before you borrow.
What happens if you leave your job
This is the biggest risk. If you change jobs, get laid off, or are fired, your 401(k) loan becomes due in full. The IRS gives you 60 days to repay the entire remaining balance. If you do not, the IRS treats the unpaid amount as a withdrawal. You owe income tax on it at your current tax rate, plus a 10% early withdrawal penalty if you are under 59½. On a $30,000 loan with $20,000 still owed, that could mean $6,000 to $8,000 in taxes and penalties.
Some plans allow you to roll the loan into an IRA or a new employer's 401(k) plan, which extends the repayment period. But this is not automatic—you have to ask, and not all plans allow it. Check with your plan administrator about what happens if you leave your job before you borrow.
This risk is especially real if you work in an industry with frequent job changes, or if your company is unstable. A mortgage or home equity line of credit does not have this cliff: if you change jobs, the loan stays with the lender, and you keep making payments as normal.
Comparing a 401(k) loan to other down payment options
A 401(k) loan is not the only way to fund a down payment. Here is how it stacks up:
| Option | Interest Rate | Tax Impact | Risk if You Change Jobs | Time to Get Money |
|---|---|---|---|---|
| 401(k) Loan | Prime + 1–2% | None (interest goes back to you) | Full balance due in 60 days | 1–2 weeks |
| Home Equity Line of Credit (HELOC) | Prime + 0.5–2% | Interest may be deductible | None; loan stays with lender | 2–4 weeks |
| Mortgage with Lower Down Payment | Varies (usually 6–8%) | Interest is deductible | None; loan stays with lender | 3–6 weeks |
| Personal Loan | 8–15% | None | None; loan stays with lender | 1–5 days |
| 401(k) Withdrawal | N/A | Income tax + 10% penalty (if under 59½) | N/A | 1–2 weeks |
A mortgage with a lower down payment (say, 10% instead of 20%) often costs less than a 401(k) loan when you factor in the lost growth on your borrowed balance. You will pay mortgage insurance (PMI), but that is usually 0.5% to 1% of the loan amount per year, and it drops off once you reach 20% equity. A HELOC (if you own a home already) is often cheaper than a 401(k) loan and carries no job-change risk.
A 401(k) withdrawal—taking the money out permanently rather than borrowing it—is almost always worse. You pay income tax on the full amount plus a 10% penalty, which can total 30% to 40% of what you take out. A $50,000 withdrawal might cost you $15,000 to $20,000 in taxes and penalties.
The long-term cost of borrowing from retirement
Even if you repay the loan on time and never change jobs, borrowing from your 401(k) costs you money in lost growth. Say you borrow $50,000 at age 35, repay it over five years, and your 401(k) averages 7% annual growth. The $50,000 you borrowed would have grown to about $70,000 by age 65 if you had left it alone. By borrowing it, you lose that $20,000 in growth—even though you repaid every dollar of principal and interest.
This cost is invisible because you do not see a bill for it. But it is real, and it compounds over decades. The younger you are when you borrow, the larger the opportunity cost. If you are 25 and borrow $50,000, the lost growth by retirement could be $100,000 or more, depending on market returns.
This is why financial advisors often recommend a 401(k) loan only as a last resort—when you have exhausted other options and the alternative is not buying the house at all, or taking on high-interest debt.
Steps to borrow from your 401(k)
If you decide to borrow, here is the process. First, contact your plan administrator (the company that manages your 401(k)—usually a large financial services firm like Fidelity, Vanguard, or Schwab). Ask whether your plan allows loans, what the maximum is, what the interest rate is, and what fees apply. Not all plans allow loans; some employers prohibit them entirely.
If your plan allows loans, request a loan application. You will need to specify the amount you want to borrow and the repayment period (usually three to five years). The administrator will calculate your monthly payment and show you the total interest you will pay. Review this carefully—it is your money, but the cost is real.
Once you are approved, the money typically arrives in your account within one to two weeks. You can then use it for your down payment. Your repayment begins on the date the loan is funded, and it comes out of your paycheck automatically.
Keep documentation of the loan terms, the repayment schedule, and your payment history. If you change jobs, you will need this to negotiate with your new employer's plan or to roll the loan into an IRA.
Frequently Asked Questions
Can I borrow from my spouse's 401(k) for our down payment?
No. A 401(k) loan is available only to the account holder. Your spouse can borrow from their own 401(k), but you cannot borrow from theirs. If you are married and both have 401(k)s, you could each borrow up to your own limit, but the loan is tied to that person's employment.
What if I cannot repay the loan before I leave my job?
You have 60 days to repay the full balance. If you cannot, the unpaid amount is treated as a withdrawal, and you owe income tax plus a 10% penalty (if under 59½). Some plans allow you to roll the loan into an IRA or a new employer's plan, which extends the repayment period. Ask your plan administrator about this option before you leave your job.
Is the interest I pay on a 401(k) loan tax-deductible?
No. Unlike mortgage interest or home equity loan interest, interest on a 401(k) loan is not deductible. However, the interest does go back into your 401(k) account, so you are not losing it entirely—it just does not reduce your taxable income.
Can I borrow from my 401(k) if I am still working for the same employer?
Yes. As long as your plan allows loans and you have a balance, you can borrow while employed. The risk of the 60-day repayment deadline only applies if you leave your job. If you stay with the same employer, you repay the loan on the schedule you agreed to, with no job-change penalty.
What if my 401(k) balance is small—can I still borrow?
You can borrow up to 50% of your balance, with a minimum of around $1,000 (this varies by plan). If your balance is $10,000, you could borrow up to $5,000. If it is $2,000, you might not meet the minimum. Check with your plan administrator about the minimum loan amount.