401(k) Loans

How long to pay back a 401k loan?

When you borrow from your 401(k), you may be allowed some time to pay back the 401(k) loan. Find out how long you have to repay a 401(k) loan.

3 min read

If you are short on cash and you have a 401(k) plan provided by your employer, you can take a 401(k) loan to meet your urgent financial needs. Borrowing from a 401(k) is a low-interest way to access cash quickly to pay your urgent bills or make a big purchase. You can borrow half of your vested balance and pay back the loan over time.

Once you take a 401(k) loan, you have up to 5 years to pay back the loan. You must make equal installments comprising the principal and interest spread over the repayment period of the loan. If you are borrowing from your 401(k) to buy your primary residence, you may be allowed up to 15 years to pay back the loan.

401(k) loan basics

A 401(k) loan allows you to access your retirement savings before you attain the required retirement age. It is not considered a true loan since it lacks some elements that are present in traditional loans. For example, a 401(k) loan does not involve credit checks, nor does it involve a lender. The account owner acts as both the lender and borrower and the loan interest is paid back to the 401(k) account.

You can borrow up to 50% of retirement savings up to a maximum of $50,000, whichever is lower. You must repay the funds under the rules designed to restore your 401(k) loan to its original state. Although the 401(k) loan is offered on a tax-free basis, you incur a small tax on the loan interest, since you pay back the loan with after-tax money. However, the tax impact is negligible since the loan interest makes up a small component of the periodic loan repayments.

How long do you have to repay a 401(k) loan?

You must pay back the 401(k) loan in five years from the date the loan was disbursed, but this duration can be longer if you are using the money to buy your primary residence. The IRS requires that the 401(k) loan must be paid at least quarterly in substantially equal installments spread over the repayment period. Most 401(k) plans require the loans to be paid through payroll deductions, where the loan payments are deducted automatically from your bank account.

If you have the option of opting out of the payroll deductions, you will be required to pay off the loan via check. If you opt for check payments, you will be solely responsible for making timely loan payments. If you miss out on a payment, you risk owing taxes and a potential penalty if the outstanding loan balance is considered a distribution.

How long to pay 401(k) when buying a primary residence?

When you are borrowing from your 401(k) to buy a home, you may be allowed more than 5 years to pay off the loan. Usually, you can take a 401(k) to pay down payment for your home. Depending on the amount borrowed, you may be allowed up to 15 years to repay the loan.

Although the 401(k) loan will not affect your credit, it could affect your ability to qualify for a mortgage. Mortgage lenders may require you to list all debts you owe, including 401(k) loans, to evaluate your creditworthiness. Also, although it is possible to take a 401(k) in place of a mortgage loan, it could be an expensive option than the latter.

How long do you have to pay back a 401(k) if you leave your job?

If you have a 401(k) loan and leave your employer, the plan administrator may require you to pay the outstanding loan balance fairly quickly. Generally, the administrator may allow you until the following year’s tax due date to clear the outstanding loan. You must come up with the outstanding balance by the tax due date and put the money into your 401(k) account.

If you are unable to pay the outstanding loan balance by the tax due date, you will owe tax as if the loan was a cash distribution. If you are below age 55 when you leave, you will also owe a 10% early distribution penalty. The plan may offset your account balance by the outstanding loan balance to pay clear the unpaid loan. You can avoid paying taxes by rolling over the loan offset to an IRA by the tax due date.

Some plans may also allow former employees to continue paying the loan even after leaving the company. If your employer provides this option, you will be required to make payments through check before the due dates. You can also pay a lump sum amount to clear the loan, and avoid a taxable distribution.