Should You Ever Borrow From Your 401(k)?

We see moments like this all the time with clients: cash is tight, an opportunity arises, or a personal expense demands immediate funding. One option that often comes up is borrowing from your 401(k).1

It can feel tempting — after all, you’re borrowing from yourself. But like most financial decisions, the reality is more nuanced. For many business owners and professionals, the 401(k) is the backbone of retirement savings. Here are the considerations we guide clients through before making the move.

The Drawbacks of Borrowing from Your 401(k)

A short-term 401(k) loan may look simple on the surface, but the trade-offs can be significant. Through scenario planning, we help families understand the long-term effects before making a decision. A few important drawbacks include:²

  • Lost growth – Removing funds from the account interrupts compounding — the engine behind long-term retirement growth.
  • Cash flow pressure – Loan repayments reduce financial flexibility and can make it harder to continue regular contributions.
  • Double taxation – Payments are made with after-tax dollars, and the distributions in retirement will be taxed again.¹
  • Employment risk –  If you leave your employer, voluntarily or otherwise, the remaining loan balance typically becomes due immediately. If you can’t repay it, it’s treated as a distribution — triggering taxes and potentially a 10% penalty if you’re under age 59½.²

The Upsides of a Short-Term 401(k) Loan

There are scenarios in which a 401(k) loan could be more efficient compared to other types of borrowing and offer various benefits, such as:

  • Lower interest rates – The interest rate is typically far cheaper than credit cards or personal loans.
  • Paying yourself back – The interest you pay goes into your account, not to a bank.
  • No credit check – Your credit score isn’t impacted.
  • Specific use cases – For one-time needs, such as funding a home down payment, a 401(k) loan can be an efficient bridge, especially if you have stable employment and a clear repayment plan.

Borrowing Alternatives Worth Exploring

We can help identify when a 401(k) loan could be an effective bridge or when another option may better support your long-term goals. Everyone’s financial picture is different, so comparing other tools that may provide more flexibility and fewer long-term drawbacks is essential:

  • Home equity line of credit (HELOC) – These often offer lower rates with interest possibly being tax-deductible.
  • Personal or bank loans – These offer straightforward financing without disrupting retirement savings.
  • Securities-based lines of credit (SBLOCs) – Access cash without liquidating investments.
  • Roth IRA basis withdrawal – In some cases, contributions (not earnings) can be accessed penalty-free.
  • Structured lending – For business owners, private banks can offer flexible, asset-backed lending tailored to complex needs.

Best Practices If You Borrow

When a 401(k) loan is the best option, treating it with discipline helps protect long-term wealth. We encourage clients to:

  • Run the numbers – Ensure the repayment schedule fits comfortably within your cash flow.
  • Borrow less than the maximum – Maintain a cushion for unforeseen needs.
  • Maintain contributions – Continue contributing if possible to keep retirement savings on track.
  • Consider employment stability – Understand your job outlook before taking on a loan that may come due unexpectedly.

Plan Before You Borrow

Before borrowing from your 401(k), it’s helpful to understand both the opportunities and risks. While a 401(k) loan can provide short-term relief, without thoughtful planning and guidance it can also come with long-term consequences. Our team of professionals is here to help you weigh all available financing options to map out long-term impacts on your cash flow, taxes, and retirement.

Remember: Your 401(k) is designed to fund your future. Borrowing from it should be the exception, not the rule.

If you’re exploring your options, contact us to discuss different scenarios and determine a smart path forward. 

Sources:

1 Fidelity Viewpoints. (2025, May 23). Thinking of taking money out of a 401(k)? Fidelity. https://www.fidelity.com/viewpoints/financial-basics/taking-money-from-401k.

2 Bopray, A. (2025, October 13). 401(k) Early Withdrawal: Pros & Cons of Tapping Your Retirement Accounts. Forbes. https://www.forbes.com/advisor/retirement/401k-early-withdrawal

This content is provided for informational purposes only and does not constitute individualized investment, tax, or legal advice. 401(k) loans are subject to plan-specific rules and involve risks, including repayment obligations upon separation from employment, potential taxes and penalties if the loan is not repaid, and reduced long-term retirement savings due to foregone investment growth. Whether a 401(k) loan is appropriate depends on individual circumstances. Readers should consult with a financial professional or tax advisor before making decisions.