Life Stages
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401(k) Loan
Many 401(k) plans allow participants to borrow against their retirement savings—often up to 50% of their vested balance, capped at $50,000. On the surface, this can look attractive because you’re “paying yourself back with interest,” but 401(k) loans come with strict rules and real risks, especially for people nearing retirement.
How 401(k) loans usually work
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Loan amount
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Often up to 50% of vested balance, with a $50,000 maximum.
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Repayment
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Typically must be repaid within five years (longer sometimes allowed for a primary home).
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Payments usually come out of your paycheck through automatic payroll deductions.
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After-tax repayment
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Repayments are made with after-tax dollars, and you’ll be taxed again when you withdraw the money in retirement.
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Key advantages
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No credit check
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Approval is based on your plan balance, not your credit score.
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Predictable repayment
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Fixed schedule, built into your payroll, can make it easier to stay on track.
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Short-term liquidity
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Can provide temporary cash for specific needs like medical bills or emergency home repairs.
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Major risks and downsides
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Job loss or job change risk
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If you leave your job or retire with a loan outstanding, you often must repay the full balance within a short window (e.g., 60–90 days).
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If you can’t repay, the remaining balance is treated as a taxable distribution, and if you’re under 59½, you may also face a 10% early withdrawal penalty.
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Lost investment growth
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Money you borrow is no longer invested, so it misses out on potential market gains and tax-deferred growth during the loan period.
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Double taxation effect
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You repay with after-tax money, and later withdrawals are taxed again as ordinary income.
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Limited access for retirees
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Once you’re retired or no longer with the employer, new 401(k) loans are usually not available—you’re limited to withdrawals instead.
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When a 401(k) loan may (or may not) make sense
A 401(k) loan is generally most appropriate when:
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You’re still employed with the plan sponsor and your job is relatively stable.
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You need short-term liquidity for a clear, specific purpose (not ongoing living expenses).
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You have a realistic, written repayment plan that fits your budget.
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You’ve compared other options and this is the least disruptive to your long-term finances.
It is much less suitable when:
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You’re close to retirement or considering a job change soon.
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You’re using the loan to cover recurring budget gaps.
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You have no clear plan for how you’ll repay on time.
Learn more from Cambridge Credit
For more background on how 401(k)s and retirement decisions fit into your overall plan, see: