401(k) Loan Calculator

How 401(k) Loans Work

A 401(k) loan allows you to borrow money from your own retirement savings. Unlike traditional loans from banks or credit unions, you are both the borrower and the lender. The money is withdrawn from your 401(k) investments, and you repay it — with interest — back into your own account through payroll deductions. This makes 401(k) loans easy to qualify for because there is no credit check and no formal application process — unlike conventional financing where your credit score plays a major role in approval and rates.

Under IRS rules, you can borrow up to 50% of your vested account balance, with a maximum of $50,000. The loan must be repaid within 5 years (unless it is used to purchase a primary residence, in which case longer terms may be allowed). Repayments are typically made through automatic payroll deductions on an after-tax basis, and the interest rate is usually the prime rate plus 1%.

While borrowing from your 401(k) may seem like a convenient, low-cost option, the true cost is often much higher than the interest rate suggests. The Department of Labor cautions that 401(k) loans can significantly reduce your retirement savings if not managed carefully, particularly because of the opportunity cost of missed investment growth.

The Real Cost: Opportunity Cost

The biggest hidden cost of a 401(k) loan is not the interest rate — it is the investment growth you miss while your money is out of the market. When you borrow $20,000 from your 401(k), that $20,000 is no longer invested and earning returns. Over a 5-year loan term, assuming a 7% average annual return, that $20,000 would have grown to approximately $28,050. The $8,050 in missed growth is the opportunity cost — money you will never recover.

This is especially costly during bull markets. If the stock market rises 15% in a year while your money is sitting in a loan, you miss out on significant gains. Conversely, if the market drops during your loan period, the opportunity cost is lower or even negative. However, because long-term market returns have historically averaged 7% to 10% annually, the expected opportunity cost is almost always significant. For large purchases like an auto loan or boat loan, the opportunity cost of a 401(k) withdrawal can exceed the interest you would pay on dedicated vehicle financing.

Our calculator above shows you the estimated opportunity cost based on your expected investment return rate. The yellow “Missed Investment Growth” section in the pie chart represents money that would have been in your retirement account if you had not taken the loan. This is the true cost of a 401(k) loan — even though you pay yourself interest, the missed growth typically far exceeds the interest saved compared to a traditional loan.

401(k) Loan Rules and Limits

Understanding the rules governing 401(k) loans is essential before borrowing. Here are the key regulations established by the IRS and enforced by plan administrators:

Borrowing limit: You can borrow up to 50% of your vested balance, with a maximum of $50,000. If you have had another 401(k) loan in the past 12 months, the $50,000 maximum is reduced by your highest outstanding loan balance during that period.

Repayment term: Most 401(k) loans must be repaid within 5 years through substantially equal payments made at least quarterly. Loans used to purchase a primary residence may qualify for longer repayment terms. Missing payments can trigger a deemed distribution.

Interest rate: The interest rate is typically the prime rate plus 1%, which is currently around 6%. The interest is paid back into your own 401(k) account. However, the interest you pay is not tax-deductible, and since you pay with after-tax dollars, the interest is effectively taxed twice — once when you earn it and again when you withdraw it in retirement.

Job separation: If you leave your employer while a 401(k) loan is outstanding, you generally must repay the remaining balance by the tax filing deadline for that year. If you cannot repay, the outstanding balance is treated as a distribution, subject to income tax and a 10% early withdrawal penalty if you are under age 59½.

Double taxation: This is often overlooked. You repay a 401(k) loan with after-tax money. When you eventually withdraw that money in retirement, it is taxed again as ordinary income. This means the principal and interest you pay back are effectively taxed twice — a significant cost that does not apply to other types of loans. Understanding all hidden costs is critical — our guide on reducing your total loan cost covers strategies that apply to both traditional and retirement-based borrowing.

When a 401(k) Loan Makes Sense (and When It Doesn't)

A 401(k) loan can be a reasonable option in certain situations, but it is rarely the best choice. Consider the following guidelines:

It may make sense when: You need a short-term loan (1-2 years) and plan to stay with your employer; you have exhausted other options and need to avoid high-interest credit card debt; you have a stable job and can comfortably make the repayments; the alternative is a significantly higher-interest debt. It may also be worth considering if you need a bridge loan for a time-sensitive purchase and traditional lenders cannot fund quickly enough.

It usually does not make sense when: You might change jobs in the near future; you are early in your career (more years of compounding growth are at stake); you are borrowing for discretionary spending like RV or motorcycle purchases that have dedicated financing options; a personal loan at a reasonable rate is available; you are using it to fund a lifestyle you cannot afford.

Before borrowing from your 401(k), compare the total cost — including opportunity cost — with alternatives like personal loans, home equity loans, or even a 0% APR balance transfer credit card. If you are considering borrowing to fund a home-related project, a construction loan may offer more favorable terms. Our calculator shows you the comparison with a typical personal loan so you can make an informed decision.

What Happens If You Leave Your Job

One of the biggest risks of a 401(k) loan is job separation. If you leave your employer — whether voluntarily, through layoff, or termination — the outstanding loan balance typically comes due. Under current rules, you have until the tax filing deadline for the year of separation (including extensions) to repay the balance.

If you cannot repay the loan in time, the remaining balance is treated as a distribution from your 401(k). This triggers two costly consequences: the amount is added to your taxable income for that year, potentially pushing you into a higher tax bracket; and if you are under age 59½, you owe an additional 10% early withdrawal penalty. On a $20,000 outstanding balance, this could mean $5,000 to $8,000 or more in taxes and penalties. That money could have been better used paying down existing debts — check your auto equity position or other loan balances to see where your dollars have the most impact.

Given the current job market where the average person changes jobs every 3 to 4 years, this risk should not be underestimated. If there is any chance you might leave your employer during the loan term, consider a personal loan instead — it is not tied to your employment and will not trigger tax penalties. Similarly, if you are carrying student debt, refinancing your student loans at a lower rate may free up cash without risking your retirement savings.

401(k) Loan Calculator: How to Use It

Our 401(k) loan calculator provides a comprehensive view of the true cost of borrowing from your retirement. Here is how to use it:

Step 1: Enter your 401(k) balance. This is your current vested balance. The calculator uses this to determine your maximum loan amount (50% of balance, capped at $50,000).

Step 2: Enter the loan amount. Choose how much you want to borrow, up to the calculated maximum. The calculator will automatically cap it at the IRS limit.

Step 3: Set the loan term. 401(k) loans must be repaid within 5 years. Choose 1 to 5 years to see how the term affects your monthly payment and total cost.

Step 4: Enter the interest rate. This is typically the prime rate plus 1%, currently around 6%. Your plan administrator can tell you the exact rate.

Step 5: Set your expected investment return. This is the annual return you expect your 401(k) investments to earn. A common estimate is 7% for a diversified portfolio. This value is used to calculate the opportunity cost — the investment growth you miss while the money is in a loan instead of invested.

The calculator instantly shows your monthly payment, total repayment amount, and — most importantly — the opportunity cost of missed investment growth. The personal loan comparison section helps you evaluate whether a traditional loan might be a better choice for your retirement long-term health. To explore paying off existing loans faster, check our loan payoff calculator. If you are considering a 401(k) loan to buy a vehicle from a private party, our auto loan private seller guide explains financing alternatives that do not put your retirement at risk.