Borrowing From Your 401(k) for a Down Payment: How It Works and What It Costs
How a 401(k) loan works as down payment money
A 401(k) loan lets you borrow money from your own retirement account and pay it back to yourself over time, usually with interest. The money comes from your account balance, not from a bank or lender. You don't need to may have access to based on credit or income the way you would for a mortgage — the account is already yours.
The process is straightforward: you contact your plan administrator (the company that manages your 401(k)), request a loan, and if your plan allows loans, they send you the money. You then repay it through payroll deductions, usually over five years, though some plans allow longer terms for down payment loans. The interest rate is typically the prime rate plus one percentage point, which is usually lower than a personal loan or credit card.
Not all 401(k) plans allow loans. Some employers prohibit them entirely. Before you assume this is an option, check your plan documents or call your plan administrator to confirm loans are permitted and what the rules are.
Key Takeaways
- You can borrow up to 50 percent of your vested account balance, with a maximum of $50,000, though your plan may set a lower limit.
- The loan must be repaid within five years for a down payment, and repayment happens through automatic payroll deductions.
- If you leave your job, the loan typically becomes due within 60 to 90 days, or it is treated as a withdrawal and you owe income tax plus a 10 percent penalty if you are under 59½.
- Borrowing from your 401(k) reduces the money growing for retirement and stops that portion from earning investment returns while you repay the loan.
- Your plan administrator can tell you in one call whether loans are allowed, what the maximum is, and what the repayment terms are.
How much you can borrow and what the limits are
Federal law caps 401(k) loans at the lesser of two amounts: either 50 percent of your vested account balance, or $50,000. If your account holds $100,000 and is fully vested, you can borrow up to $50,000. If your account holds $60,000, you can borrow up to $30,000 (half of $60,000). If your account holds $80,000, you can borrow $40,000 (half of $80,000), not the full $50,000 cap.
Your individual plan may set a lower limit. Some employers allow only $10,000 or $25,000 loans. Some require a minimum loan amount. Your plan documents or administrator will state the exact rules for your account.
The vested balance matters. If part of your 401(k) is employer matching that hasn't vested yet, that portion doesn't count toward the borrowing limit. Only money that is legally yours — your contributions plus vested employer contributions — can be borrowed against.
What happens to your taxes and retirement savings
While you are repaying the loan, you don't owe income tax on the borrowed amount. The money you borrowed was already in your account and already taxed when you earned it. You only pay interest, which goes back into your own account.
However, the money you borrowed stops growing. If you borrow $30,000 and the stock market rises 8 percent that year, you miss out on $2,400 in gains on that $30,000. Over five years of repayment, that lost growth can be substantial. This is the real cost of a 401(k) loan — not just the interest, but the investment returns you don't earn.
If you leave your job before the loan is repaid, the situation changes. Most plans require you to repay the full remaining balance within 60 to 90 days. If you don't, the unpaid balance is treated as a withdrawal. You then owe income tax on that amount plus a 10 percent early withdrawal penalty if you are under 59½. On a $20,000 unpaid balance, that could mean $6,000 or more in taxes and penalties.
The risk if you change jobs or lose employment
A 401(k) loan becomes a serious problem if your employment ends. When you leave a job, the loan is typically due in full within 60 to 90 days. If you can't repay it, the IRS treats the unpaid balance as a distribution from your retirement account.
That distribution triggers two costs: income tax at your ordinary tax rate, plus a 10 percent early withdrawal penalty if you are under 59½. If you borrowed $25,000 and can't repay it, and you are in the 22 percent tax bracket, you owe $5,500 in income tax plus $2,500 in penalty — $8,000 total. That money comes out of your pocket, not your account.
Some plans allow you to roll the loan into an IRA or new employer's 401(k) plan to avoid the immediate repayment deadline, but this is not automatic and depends on your plan's rules and the new plan's rules. Don't assume this option exists for you — ask your plan administrator before you borrow.
Comparing a 401(k) loan to other down payment sources
A 401(k) loan is one option among several. Here's how it stacks up against common alternatives:
| Source | Speed | Cost | Risk if you leave your job |
|---|---|---|---|
| 401(k) loan | 1 to 2 weeks | Interest only; lost investment growth | Full repayment due in 60–90 days or owe taxes and 10% penalty |
| Personal loan | 1 to 5 days | Higher interest rate (6–36%); no impact on retirement | No impact; you keep your retirement account intact |
| Gift from family | Immediate | None | No impact; no repayment obligation |
| Down payment assistance program | 2 to 8 weeks | None or low cost; may require income limits | No impact; no repayment obligation |
| Roth IRA withdrawal (if you have one) | 1 to 2 weeks | None if you withdraw contributions only; taxes if you withdraw earnings | No impact; money is already out of retirement account |
A 401(k) loan makes sense if you have a stable job, plan to stay there through repayment, and want to avoid taking on new debt. It doesn't make sense if you are thinking about changing jobs soon or if your employment is uncertain.
Steps to request a 401(k) loan for a down payment
First, contact your plan administrator. This is usually the company that sends you your quarterly statements or manages your account online. You can find the contact information on your most recent statement or in your employee benefits materials. Ask three questions: Does the plan allow loans? What is the maximum you can borrow? What is the repayment term for down payment loans?
If loans are allowed, request a loan application. The administrator will ask you to specify the loan amount and the purpose (down payment). They will verify your vested balance and calculate the maximum you are allowed to borrow. You will sign the loan agreement, which states the interest rate, repayment term, and what happens if you leave your job.
Once approved, the money is usually deposited into your bank account within one to two weeks. Repayment begins immediately through payroll deductions. Your paycheck will be reduced by the loan payment amount each pay period.
Keep records of all loan documents and repayment confirmations. If you change jobs, you will need proof of the loan terms to negotiate with your new employer's plan or to roll the loan into an IRA.
What to consider before borrowing from your retirement account
Borrowing from your 401(k) means less money working for you in retirement. If you are in your 30s or 40s, that $30,000 you borrow could grow to $100,000 or more by the time you retire, depending on investment returns. That lost growth is a real cost, even though you don't see it on a statement.
You are also betting that your job stays stable. If you are laid off, fired, or decide to leave, the loan becomes an immediate problem. Many people in this situation end up taking the tax hit because they can't repay the full balance on short notice.
Consider whether you could reach your down payment goal another way: by saving longer, by asking family for a gift, by looking into down payment assistance programs in your state or city, or by taking a personal loan instead. Each option has different costs and risks. A 401(k) loan is not always the cheapest or safest choice, even though it feels like "your own money."
Frequently Asked Questions
Can I borrow from my 401(k) if I am self-employed or have a Solo 401(k)?
Yes, Solo 401(k) plans typically allow loans. The rules are the same: you can borrow up to 50 percent of your vested balance or $50,000, whichever is less. Contact your Solo 401(k) provider to confirm the loan terms and repayment schedule.
What if I pay back the loan early?
Most plans allow early repayment without penalty. Paying back early stops the interest from accruing and gets that money back into your account to earn investment returns. Check your plan documents to confirm there is no prepayment penalty.
Do I owe taxes when I repay the loan?
No. Repayment is not a taxable event. You are putting money back into your own account. You only pay the interest, which is also not taxable because it goes back into your account.
Can I borrow from my spouse's 401(k) instead of my own?
No. You can only borrow from a 401(k) account that is in your name. Your spouse would need to borrow from their own account. If your spouse is not employed or does not have a 401(k), this option is not available to you.
What happens if I can't make a loan payment?
Missing a payment is treated as a default. Your plan administrator will typically give you a grace period (usually 90 days) to catch up. If you don't, the unpaid balance is treated as a withdrawal, and you owe income tax plus a 10 percent penalty if you are under 59½. Contact your plan administrator immediately if you think you will miss a payment to discuss your options.