401(k) Loans

How many times can you borrow from 401k?

As long as you have a vested balance and your plan allows 401(k) loans, you may be allowed to take a 401(k) loan. Find out how many times you can borrow from 401(k).

3 min read

If you are in a tight spot financially, a 401(k) loan can be a low-cost way to borrow money without contacting a lender. Generally, 401(k) loans have some of the lowest interest rates in the market, and the interest you pay goes back to your account. If the first 401(k) loan is not sufficient to meet your needs, you may consider borrowing a second loan to bridge the gap.

You can borrow from your 401(k) account multiple times as long as you don’t exceed the IRS limit. Typically, you can borrow a maximum of $50,000, or half of your vested balance, whichever is lower. If the first 401(k) loan used up the IRS limit, you may not be allowed to take another loan until you have fully paid the loan. 401(k) plans place borrowing limitations over a 12-month period.

401(k) loan limit

Before you decide how much more you can borrow from your 401(k), you must first figure out the total allowable loan limit. Generally, the IRS allows 401(k) participants to borrow a maximum of $50,000 or half of their vested balance, whichever is smaller.

If you have a vested balance of $80,000, your 401(k) loan cannot exceed $40,000. However, if your vested balance is $200,000, you can only borrow a maximum of $50,000, and not $100,000.

The vested balance comprises your contributions and the portion of the employer's contributions that you would keep if you were to leave the company. If the employer offers immediate vesting, you get to keep all the employer's contributions. However, if the company has a graded vesting schedule, the amount you get to keep depends on the number of years you've worked in the company.

Can I take an additional loan from my 401(k)?

Most 401(k) plans allow one loan at a time, and this means you must pay back the first loan fully before you can be allowed to take another loan. However, if your plan allows multiple loans at a time, you can take an additional loan at any time within a rolling 12-month period as long as you have not exceeded the loan limit.

For example, if your 401(k) vested balance is $120,000, your loan limit is $50,000. If you borrowed $30,000 from your 401(k), you cannot borrow more than $20,000 as a second loan in a 12-month rolling period even if you paid the first loan early.

How often can you borrow from 401(k)?

If your employer allows multiple 401(k) loans, you can borrow more than one loan at a time. However, any new loan should not exceed the plan loan limit. 401(k) plans place limitations on borrowing from 401(k) over a 12-month rolling period. This means that, if you took two loans between February of the previous year and February of the current year, and you have used up the loan limit, you cannot borrow another loan in the same period even if you paid the first loan early. Hence, you will have to wait after the 12-month period to take another loan.

Is it a good idea to borrow from your 401(k)?

Borrowing from 401(k) might be good or bad depending on how you use the 401(k) loan.

Taking a 401(k) loan might be a good thing for your finances if you are using the loan proceeds to pay off high-interest debts. For example, using a 401(k) loan to settle credit card balances can help reduce the interest you are paying on the loan.

Borrowing from 401(k) can also help you raise the value of your home. You can use the loan to pay for roof replacement, repaint the external walls, or fix broken fixtures and fittings before a planned sale. This can help raise the equity value of your property.

On the downside, borrowing from 401(k) might be a bad idea if you are using the loan to buy gifts and entertainment. For example, using the loan to pay for a vacation in your working years could be a bad thing for your retirement. It is better to use another source of cash to pay for the vacation and leave the retirement money fully invested.

Should you borrow from 401(k)?

Your 401(k) may be a good place to tap into when you need short-term liquidity. However, before tapping into your retirement money, you should explore other sources of cash available.

If borrowing from your 401(k) is the only option you have, you should understand the loan terms, and have a plan on how you will repay the loan. Using a 401(k) loan for the right short-term reasons can be the most convenient and lowest-cost of cash available.

Plan to make 401(k) loan payments ahead of schedule or make a lump sum payment to pay off the loan. The sooner you pay off the loan, the quicker you can return your money to generate returns while avoiding derailing your retirement progress.