Can I Borrow from My 401(k)? Rules, Risks and Expat Considerations

This article outlines how 401(k) loans work, what the IRS permits, and what internationally mobile individuals—especially US expats—must consider before borrowing.

From borrowing limits and repayment rules to tax risks and foreign reporting exposure, we explain what you need to know before taking this step.

What Is a 401(k) Loan?

A 401(k) loan is a form of borrowing in which you take funds from your employer-sponsored retirement plan—such as a 401(k) or 403(b)—and agree to repay the loan, with interest, over a defined period.

Unlike traditional lending, a 401(k) loan involves no credit check or underwriting process, as you are borrowing from your own retirement assets. The interest you pay is deposited back into your account, rather than to a third-party lender.

However, repayments must be made using after-tax income, and the funds—along with the interest—will be taxed again when withdrawn in retirement. This results in a form of double taxation on the interest component.

While the interest payments may partially offset the lost investment growth, withdrawing funds from your 401(k) reduces the balance available for long-term compounding. Loan availability is subject to IRS regulations and the terms of your specific plan, which may restrict or prohibit loans—particularly for international employees or those on foreign assignments.

How Much Can I Borrow From My 401(k)?

Under Internal Revenue Service (IRS) rules, you may borrow up to the lesser of:

• $50,000, or
• 50% of your vested 401(k) balance.

If 50% of your vested amount is less than $10,000, the IRS allows you to borrow up to $10,000—subject to a formula that considers any previous loan balances within the past 12 months.

Vested funds refer to the portion of your 401(k) that you fully own. Your own contributions typically vest immediately. However, employer contributions may be subject to a vesting schedule. If you leave your job before completing this schedule, you may forfeit some or all of your employer’s contributions.

While these are the maximum limits set by the IRS, the amount you may borrow depends on your specific plan’s terms. Some employers prohibit loans altogether, while others require spousal consent or additional documentation.
To understand your borrowing capacity, consult your plan’s Summary Plan Description or contact your HR department or plan administrator.

How Many Times Can I Borrow From My 401(k)?

There is no IRS-imposed limit on the number of 401(k) loans you can take. However, most 401(k) plans allow only one outstanding loan at a time, and many limit participants to one loan per 12-month period.

The total amount borrowed must always remain within the IRS cap—$50,000 or 50% of your vested account, whichever is lower, as adjusted for prior loans.

Is a 401(k) Loan Taxable?

A properly structured 401(k) loan is not treated as a taxable distribution. However, the loan must comply with IRS rules, including repayment terms and limits.

If you fail to repay the loan as agreed—or if you leave your job and do not repay the balance in time—the outstanding amount will be treated as a taxable distribution. If you are under age 59½, this could also trigger a 10% early withdrawal penalty.

Loan repayments must be made with after-tax income, and the interest you pay into your account will be taxed again upon withdrawal in retirement—resulting in double taxation on the interest portion.

401(k) Loan vs. 401(k) Withdrawal: Key Differences

Although 401(k) loans and 401(k) withdrawals are both ways of accessing your retirement savings, they have different consequences, rules, and tax implications. The table below highlights the main differences between 401(k) loans and withdrawals.

What Are the Repayment Rules for 401(k) Loan?

The IRS prescribes specific rules for 401(k) loan repayments, which your employer’s plan may tighten further. To avoid tax penalties or a disruption to your long-term financial plans, you must comply with the following repayment conditions:

1. Loan term and repayment schedule.
2. Interest rate.
3. Defaults and tax treatment.
4. Termination of employment.

Loan Term and Repayment Schedule

In general, you are given five years to repay a 401(k) loan. If the funds are used to purchase a primary residence, your plan may permit an extended repayment term—typically between 10 and 15 years, depending on the employer’s policy.

The IRS does not set a specific maximum term for residential loans, but appropriate documentation—such as a signed sales and purchase agreement—is usually required.

The IRS also mandates specific repayment conditions:

• The principal and interest must be repaid in substantially equal instalments.
• Repayments must occur at least quarterly, though your plan may allow weekly, biweekly, or monthly arrangements.
• Most 401(k) loans are repaid via automatic payroll deductions, where a fixed amount is withheld from your salary and redirected to your retirement account.

Some plans may also allow manual repayments through bank transfers or cheques, subject to plan rules.

Loan Interest Rate

The interest rate on a 401(k) loan is typically determined by your plan provider and is based on the prime rate—the benchmark rate applied to borrowers with strong credit—plus an additional 1 to 2 percentage points. In most cases, this rate is fixed at the time the loan is issued and remains constant throughout the repayment period.

Although you are required to pay interest, the repayments are made to your own account, rather than to an external lender. This internal borrowing structure is often seen as advantageous.

However, repayments are made with after-tax income, and the interest will be taxed again upon retirement withdrawal—resulting in double taxation on the interest portion.

Defaults and tax treatment

If a 401(k) loan is not repaid on schedule—either due to missed payments or the expiry of the agreed repayment period—the IRS will classify the outstanding balance as a deemed distribution. This amount becomes immediately taxable as ordinary income and is reported on Form 1099-R.

If you are under age 59½ at the time of default, a 10% early withdrawal penalty will also apply, unless you meet a specific IRS exemption.

In cases where the default occurs due to employment termination, your plan may initiate a loan offset—reducing your 401(k) balance by the unpaid amount.

You may avoid tax on the offset if you complete a rollover into an eligible retirement account by your tax return deadline, including extensions.

Termination of Employment

If your employment ends before you have repaid your 401(k) loan in full—whether due to resignation, redundancy, or dismissal—your employer may initiate a loan offset. This means the unpaid balance is subtracted from your 401(k) account and treated as a deemed distribution.

Unless you repay the outstanding amount or complete a rollover into an eligible retirement account (such as an IRA) by your tax return due date, including extensions, the offset amount will be subject to income tax. If you are under the age of 59½, an additional 10% early withdrawal penalty may apply.

While some plans offer a short grace period (e.g. 60 to 90 days) to repay the balance directly after termination, others require immediate repayment or do not permit post-termination repayments at all. It is important to review your plan’s rules in advance of any change in employment status.

What 401(k) Loans Mean for US Expats

For US citizens and green card holders living abroad, borrowing from a 401(k) plan introduces several cross-border complexities. While the loan may comply with IRS rules, the tax, reporting, and practical implications can differ significantly under foreign tax systems and local regulations.

Foreign Tax Treatment and Double Taxation Risk

A 401(k) loan is not classified as a taxable distribution under US law if it meets IRS conditions. However, in many jurisdictions, the borrowed amount may be treated as a taxable event, especially in countries that do not recognise the tax-deferred nature of US retirement plans.

Without a favourable Double Taxation Agreement (DTA), this could result in double taxation—where the loan or repayments are taxed in the foreign jurisdiction and later taxed again upon retirement withdrawal in the US.

FATCA and FBAR Considerations

While 401(k) account balances are generally not reportable on the Foreign Bank Account Report (FBAR), any foreign distribution, transfer, or rollover of retirement assets may trigger enhanced scrutiny under FATCA (Foreign Account Tax Compliance Act).

Expats should ensure they remain compliant with all foreign reporting requirements and understand how retirement fund activity may appear to foreign tax authorities.

Currency and Liquidity Challenges

Converting a 401(k) loan disbursement from US dollars into local currency introduces foreign exchange (FX) risk. If the currency weakens during the loan term, repayments may become more costly in real terms. This can erode the perceived benefit of borrowing against retirement assets.

Employer and Plan Restrictions

Some US employers prohibit 401(k) loans once an employee relocates abroad. In other cases, loans may be accelerated upon international assignment or contract termination.

Repaying an outstanding loan from overseas may be logistically difficult, particularly if your plan does not permit foreign-based payments or if communication with HR or the plan administrator is delayed.

US expats should seek guidance from a cross-border financial planner before taking a 401(k) loan. The interaction between IRS rules and local tax laws, coupled with FX risk and compliance concerns, requires a comprehensive view of your international financial position.

Can I Pay Off My 401(k) Loan Early?

Most 401(k) plans allow participants to repay loans ahead of schedule without penalties, provided that early repayment complies with the plan’s specific rules.

Paying off your loan early may reduce the long-term opportunity cost by enabling you to resume contributions and maximise the compounding growth of your retirement portfolio.

However, early repayment does not alter the tax treatment of loan interest, which is paid with after-tax income and taxed again upon distribution.

If you are living abroad, early repayment may involve logistical and currency challenges, especially if your plan restricts foreign bank transfers or requires payroll-based deductions.

Always consult your plan documentation and a cross-border adviser before making lump sum repayments from overseas.

In general, there are three early loan repayment methods you can use:

1. Increased payroll deductions.
2. Manual payments.
3. Lump sum repayment.

Increased Payroll Deductions

If your plan only permits payroll-based repayments, you may request a higher deduction from each paycheque to accelerate your loan repayment. Contact your employer’s HR or benefits team to initiate this change.

Manual Payments

Some plans permit periodic manual repayments, either via bank transfer or cheque. This option offers greater flexibility, but you must confirm whether your plan accepts off-cycle payments and how they are credited.

Lump Sum Repayment

Where allowed, a lump sum payment can be used to pay off the entire outstanding balance in one transaction.

You may coordinate this by writing a cheque or transferring funds to the plan’s loan repayment facility.

Always verify the process with your plan administrator, particularly if you are making payments from a foreign bank account.

Should I Borrow From My 401(k)?

A 401(k) loan can provide liquidity in times of financial need, but the decision to borrow should be made only after a detailed assessment of your objectives, cash flow, and long-term retirement strategy.

While the loan offers lower interest and quick access to funds, it carries risks—including missed market gains, contribution suspensions, and possible tax penalties if not repaid on schedule.

For instance, you may want to take out a 401(k) loan to:

• Covering tuition fees for a child or dependent.
• Paying urgent, uncovered medical expenses.
• Making a down payment on a primary residence.
• Consolidating or retiring high-interest personal debt.
• Preventing foreclosure or eviction.

However, using retirement savings for non-essential or discretionary expenses is generally discouraged. The impact on your future financial security may be greater than expected.

To understand how borrowing from your retirement savings might impact you, you must:

1. Assess your financial situation.
2. Determine the loan amount carefully.

Assess Your Financial Situation

Ask the following:

• Can you meet the loan repayments without straining your budget or lifestyle?
• Do you have a backup plan if your employment ends before the loan is repaid?
• Will the loan force you to pause contributions or sell other investments?
• Can your retirement plan withstand the effect of missing market growth during repayment?

Missing contributions, or missing out on compound growth—even briefly—can significantly hinder portfolio performance over time, particularly for high-net-worth individuals who rely on tax-deferred growth.

Determine the Loan Amount Carefully

If borrowing is appropriate, request only the amount needed to address the financial objective—ideally one that:

• Is within IRS borrowing limits.
• Will not force a significant pause in contributions.
• Can be repaid comfortably within the loan term.
• Aligns with your broader retirement plan and liquidity needs.

Professional Advice Is Essential

For US expats and internationally mobile individuals, additional layers of complexity—such as foreign tax treatment, currency exchange risk, plan restrictions, and compliance obligations—must be considered.

A cross-border financial adviser can help you assess whether a 401(k) loan aligns with your long-term financial goals and international obligations.

Pros and Cons of Borrowing From 401(k)

A 401(k) loan may offer liquidity at lower cost than traditional lending—but it comes with material trade-offs.

The decision to borrow should weigh both financial convenience and the potential long-term impact on retirement savings.

How To Borrow From 401(k)

Not all 401(k) plans permit loans, and those that do often impose restrictions based on plan design, employment status, and residency.

Before considering a loan, it is essential to review your plan’s specific rules and assess whether borrowing aligns with your financial goals and retirement strategy.

For internationally mobile individuals, note that many US employers do not allow plan loans if you are based overseas or paid outside the US.

Steps to Take Before Borrowing

To determine whether you are eligible to borrow from your 401(k), take the following steps:

• Review your Summary Plan Description (SPD) to confirm loan availability, repayment terms, and borrowing limits.
• Contact your employer’s HR or benefits team for guidance on whether plan loans are permitted under your specific employment arrangement.
• Understand plan-specific restrictions regarding:
  • Who qualifies for a loan.
  • Minimum and maximum borrowing amounts.
  • Repayment frequency and method (e.g., payroll deduction).
  • Applicable interest rates and administrative fees.
  • Whether loans are permitted for employees based abroad.

Application Process

Once you have confirmed eligibility and reviewed the loan terms:

• Access the loan application via your employer-sponsored retirement plan’s online portal, if available.
• Submit any required documentation (e.g. loan purpose, bank details, ID verification).
• If online applications are not supported, contact the plan administrator directly to request paper-based or assisted processing.
• Upon approval, loan proceeds are typically disbursed by direct deposit or cheque within a few business days.