Loans from Qualified Retirement Plans

Employees may borrow money from their 401(k), 403(b) and government retirement plans for any purpose, including paying for college. Individual Retirement Accounts (IRAs) are not eligible.

The aggregate loan limit for all loans from an employer’s retirement plans is generally up to $50,000 or half the vested balance in the retirement plan, whichever is less, and at least $10,000 (if the vested balance is less than $10,000). The $50,000 limit is reduced by the amount of principal repaid on existing plan loans within the last year.

The interest rate must be commercially reasonable. Typically, this yields an interest rate of around 5%. The interest paid is generally not deductible, even if the loan proceeds were used to pay for a home or for college. While some people argue that the interest means you are paying yourself, the interest merely replaces what the retirement plan would have earned if the money had remained invested.

The loan must generally be repaid within 5 years using substantially level payments. (Plan loans may be longer than 5 years if used to purchase the employee’s principal place of residence.) If the taxpayer does not repay the loan, the IRS will treat the full amount of the loan as a distribution, subject to income tax and, possibly, a 10 percent early distribution tax penalty. If the taxpayer separates from his or her employer, he or she must repay the loan immediately or the full amount will be treated as a distribution.

Contributions to the retirement plan (and any associated employer match) are suspended until the loan is fully repaid. This may represent a significant lost opportunity, since the employer match is free money.

A suspension of the repayment obligation is permitted for a leave of absence of up to one year, but upon return the participant must either increase the loan payments or make a lump sum payment at the end of the repayment term to ensure that the loan is fully repaid within the original 5-year term. The main exception is for loan suspensions for military service, in which case the leave of absence does not count against the 5-year term.

Not every retirement plan will offer plan loans. Federal law allows qualified retirement plans to offer plan loans, but does not require them to do so.

Coordination Restrictions

Loans from qualified retirement plans may be made for any purpose and are not subject to coordination restrictions.


The requirements for loans from a qualified retirement plan must be specified in a written plan of the employer that sets forth the amount of the loan, the repayment schedule and the level amortization requirement. It must also be an enforceable agreement.

Loans from qualified retirement plans may be made for any purpose. The plan participant does not need to demonstrate hardship.

The participant’s spouse may be required to consent to the loan.

Financial Aid Impact

The proceeds of a retirement plan loan, if unspent, must be reported as an asset on the Free Application for Federal Student Aid (FAFSA).

Low-cost federal education loans, such as the Federal Stafford loan (a student loan) and the Federal Parent PLUS loan (a parent loan), offer a flexible alternative to retirement plan loans.

Income Phaseouts

There is no phaseout on eligibility for loans from qualified retirement plans.


The legislation authorizing loans from qualified retirement plans does not expire.


IRS Publications

Current Law

Legislative History

DISCLAIMER: The information contained on this web site is provided for general informational and educational purposes and is not, nor intended to be, legal, financial or tax advice. The publisher is not authorized to practice in front of the IRS and is not subject to IRS Circular 230. This information is general in nature and may not apply to the specific circumstances of individual readers. No claims are made about the accuracy, timeliness or usefulness of the content contained on this web site or any site linked to this site. Users of this site should seek specific guidance directly from a qualified legal, financial or tax professional. Nothing contained on or provided through this site is intended to be or is to be used as a substitute for professional advice.

The Student Survival Guide: The perfect tool for navigating high school & college!
Try it!