Plan loans

How it works

Federal law caps a plan loan at the smaller of $50,000 or half the vested balance, and a plan may set a lower cap or a minimum. Repayment runs through payroll over no more than five years, unless the loan buys the worker's main home, in which case the plan may allow longer. The interest, often set at the prime rate plus a point, is paid back into the worker's own account. The borrowed money comes out of the investments and stops earning until it is repaid. If the worker leaves the job or misses payments, the unpaid balance is treated as a distribution, taxed as income, and subject to the 10 percent (2025, verified on the official page) percent addition for a worker under 59 and a half, unless it is repaid or rolled over by the tax filing deadline for that year.

What it gives

There is no credit check, and the interest goes back into the worker's own account.

Repayment through payroll is automatic and the rate is usually lower than a credit card.

A loan, unlike a withdrawal, does not trigger tax when it is taken.

What it costs, or where the catch is

The borrowed money misses market growth while it is out of the account.

Leaving the job can turn the whole unpaid balance into taxable income with the penalty.

Repayments come from after tax pay, and the money is taxed again when withdrawn in retirement.

A worked example

Amara has a vested balance of $40,000 and borrows $15,000 over five years at 8 percent interest. Her payroll deduction is about $304 a month, and over five years she pays back about $18,240, of which about $3,240 is interest into her own account. She leaves her job in year two with $10,500 still owed and cannot repay it. That $10,500 is taxed as income, and at 24 percent plus the 10 percent addition she owes about $3,570.

Where it goes wrong

The common miss is borrowing with a plan to stay, then changing jobs, and learning that the whole unpaid balance is due by the tax deadline or becomes taxable.

Who confirms it for you

For your own numbers, the plan administrator or HR. This page explains how the rule works for people in general; it does not know your situation and does not tell you what to do.

The official source

IRS: Retirement topics, plan loans. Every figure that changes by year comes from the site's rules table, which the watcher checks against the official page on a schedule; where a figure is not yet verified, this page says so instead of printing a number.