401(k) Loan Rules for 2026: How Much You Can Borrow and How It Works

How much can you borrow from a 401(k)?

Most people arrive at this question with a number already in mind, usually the size of a bill they are looking at. The law answers it in one line. Your legal maximum is 50% of your vested balance, capped at $50,000 (IRC §72(p)). Whichever of those two numbers is smaller is your ceiling.

“Vested” means the part of the account you own outright and would keep if you walked out tomorrow. Everything you contributed from your own paycheck is always 100% vested. Employer money vests on your plan’s schedule, which is why the amount you can borrow against is sometimes smaller than the balance printed on your statement. The vesting guide walks through the common schedules if you are not sure where you stand.

Your plan is allowed to be stricter than the law, and plenty of plans are. Common extra rules include a minimum loan amount, often $1,000, a cap on how many loans you can have at once, and restrictions on which contribution sources you can borrow against. None of that comes from the IRS. It comes from your employer’s plan document, so your summary plan description is where you confirm it.

Here are three quick examples of how the 50%/$50,000 rule plays out in practice.

• Vested balance $20,000: maximum loan is $10,000, which is 50% of the balance, well under the cap.
• Vested balance $230,000: maximum loan is $50,000. Fifty percent would be $115,000, but the statutory cap controls.
• Prior loans in the last 12 months: see the lookback rule below. Recent borrowing shrinks the $50,000.

The 12-month lookback rule

The $50,000 cap is reduced by your highest outstanding loan balance during the previous 12 months (IRC §72(p)(2)(A)). This is the “12-month clearing period” people ask about, and it catches a lot of borrowers by surprise. You cannot pay off a $50,000 loan on Friday and take a fresh $50,000 on Monday.

Congress wrote the lookback into the statute for a reason. Without it, participants could use back-to-back loans as permanent, revolving access to retirement money, which is not what the tax break on that money was meant to fund. Knowing the rule exists is useful even if you are nowhere near the cap, because it means a loan you took and repaid last spring can still shrink what you can borrow this fall.

Number of loans allowed

Federal law does not limit the number of loans you can have. It limits only the combined dollar amount. The count limit comes from your plan document instead, and plans differ quite a bit here. Many allow just one loan at a time, some allow two (often one general purpose and one principal residence loan), and a few allow more.

However many loans your plan permits, all of your outstanding balances together still have to stay within the 50%/$50,000 limit. In practice that means a second loan is usually much smaller than the first, and sometimes there is no room for one at all.

Eligibility requirements

Loans are an optional plan feature. Not every plan offers them, though most large plans do. This is the first thing to confirm, because everything else on this page depends on it.

If your plan does offer loans, it has to make them available to all participants on a reasonably equivalent basis under the IRS plan-loan rules. There is no credit score test, no income test, and no hardship test. Nobody decides whether your reason is good enough.

You generally do need to be an active employee, because repayment runs through payroll and there has to be a paycheck to deduct from. Check your summary plan description or ask your administrator whether loans are offered and on what terms. Your plan document controls.

The application process

At major recordkeepers (Fidelity, Empower, Vanguard, Principal, Voya) the flow is much the same. You log in, find “Loans” under your plan, and the site shows your maximum available amount already calculated for you. From there you choose the amount and the term, review the interest rate and any fees, and sign electronically.

General purpose loans usually need no documentation at all. Principal residence loans require proof of the home purchase, which is the trade-off for their longer term. Funds typically arrive within a few days to two weeks, by check or direct deposit.

One step can slow things down more than people expect, and that is spousal consent. Some plans, generally those subject to the survivor-annuity rules, require your spouse’s written and often notarized consent before a loan is issued. Most 401(k) plans do not, but if yours does, build in time to get the signature and to find a notary.

Credit checks and credit reporting

You are borrowing your own money, so there is no credit check, no underwriting, and no effect on your credit score. The loan does not appear on your credit report at all. Even a default is never reported to the credit bureaus, which surprises people who expect a missed payment to follow them around.

The consequences of default are taxes, not credit damage. That is genuinely better in some ways and worse in others, since a tax bill arrives all at once. Mortgage lenders may still ask about the payment when calculating your debt-to-income ratio, but they learn about it from you and from your pay stub, not from a credit bureau.

Will my employer know if I take a 401(k) loan?

Yes, and it is better to know that up front. There is no way to keep a 401(k) loan entirely invisible to your employer, because repayments come out through payroll deduction and someone in HR or payroll has to set that deduction up. That is the honest answer. Here is the fuller picture, which is less alarming than it first sounds.

• No reason is required. For a general purpose loan you never state what the money is for, so nobody at your company learns why you borrowed.
• It’s administrative, not managerial. The people who see it are payroll and benefits staff processing a deduction code. There is no rule or routine process that notifies your manager, and benefits information is treated as confidential personnel data.
• It’s common. Loan processing is routine recordkeeper work, not an event your employer evaluates.

If the visibility still bothers you, ask your benefits contact who at the company can see loan records. Most will tell you plainly, and most of the time the answer is a small payroll team that processes dozens of these a year without a second thought.

401(k) loan vs. hardship withdrawal vs. regular withdrawal

If you can afford the payments and expect to stay employed, a loan usually beats a hardship withdrawal. It avoids current income tax, it avoids the 10% early-withdrawal penalty, and the money comes back to your account as you repay it. A hardship withdrawal is not the villain here, though. It makes sense when you genuinely cannot afford a repayment on top of everything else, because a loan you cannot pay turns into the same tax bill with extra steps.

When borrowing makes sense

People who borrow from a 401(k) are usually not being reckless. They are covering a medical bill, stopping an eviction or a foreclosure, or bridging a short gap where the alternative is a credit card at a much higher rate. Those are reasonable uses of money you already own, and the loan exists precisely so the account can help you in a year like that.

The loan is a worse fit for discretionary spending, meaning vacations, upgrades, and purchases you could not otherwise afford. Every borrowed dollar is out of the market until you repay it, and an unexpected job change can turn the outstanding balance into a taxable distribution. That is the real risk, and it has nothing to do with whether your reason was a good one.

Two questions are worth sitting with before you apply. Will you still be at this employer for the life of the loan, and if not, could you pay it off or roll the balance over when you leave? And what are you giving up in investment growth and fees while the money is out? If either answer worries you, price out the alternatives first.

• ☐ Confirm your plan offers loans. Check the summary plan description or call the recordkeeper. Loans are optional, and no law requires your employer to offer them.
• ☐ Look up your vested balance, not your account balance. The 50% test runs on the vested number, and for newer employees the two can be far apart.
• ☐ Ask for your maximum available loan amount. The recordkeeper applies the 50% test, the $50,000 cap, and the 12-month lookback for you, so you are not guessing.
• ☐ Ask what the loan costs to set up. Origination fees are commonly $50 to $100, and some plans add a small annual fee. Fees go to the recordkeeper, not back to you.
• ☐ Find out whether spousal consent is required. If it is, a notarized signature can add a week you did not plan for.
• ☐ Run the payment through your actual budget. Payments come out of every paycheck after tax, on top of your contributions, and you cannot lower them later.
• ☐ Ask what happens if you leave or are laid off. Find out whether the plan accepts payments from former employees, and remember you can roll an offset balance over by your tax-filing deadline including extensions.
• ☐ Keep contributing at least enough for the full match. Loan payments are not contributions, and stopping your deferrals to afford the payment gives up free money.

The rest of the loan rules

Each topic below has its own page with the full statutory details and examples.

• General purpose vs. principal residence loans: the two loan types, terms, and documentation.
• Repaying a 401(k) loan: payroll deduction mechanics, early payoff, and what happens when you leave your job.
• Interest rates and fees: how the rate is set, who gets the interest, and what loans really cost.
• Default consequences and penalties: deemed distributions, the cure period, and the tax bill.
• Loans during a leave of absence: the 12-month suspension rule, FMLA, disability, and military leave.

Related reading

• How to pay back a 401(k) loan and pay it off early
• What happens if you default on a 401(k) loan
• Hardship withdrawals: what qualifies and how they’re taxed

Sources: IRC §72(p) · Treas. Reg. §1.72(p)-1 · IRS: retirement plan loans