Not all 401(k) plans allow loans
Offering loans is optional for employers, and not all plans permit it. Even if loans are allowed, your plan may set stricter limits than the IRS maximums -- a lower cap on how much you can borrow, a minimum loan amount, or a restriction on how many loans you can have outstanding at once. Before you count on this option, contact your plan administrator to confirm whether loans are available and what the specific terms are.
What if you leave your job?
This is the detail that catches people off guard most often. Leaving your job, whether voluntarily or not, used to trigger a 60-day repayment deadline. That changed under the Tax Cuts and Jobs Act of 2018. Now you have until Tax Day for the year you separated from your employer (typically April 15) to repay the full outstanding balance. If you file an extension, that deadline extends to October 15.
For example, if you have an outstanding loan and lose your job in 2026, you have until April 15, 2027, or October 15, 2027 with an extension, to repay everything you owe.
This longer deadline reduces the risk somewhat compared to the old 60-day rule, but if you've spent the money and then face an unexpected job loss, coming up with the full repayment amount on a tight timeline can still be very difficult. Anything unpaid after the deadline is treated as a taxable distribution, subject to income tax and the 10% early withdrawal penalty if you're under 59½.
What happens if you default?
If you don't pay your 401(k) loan back as required, whether because you missed payments or couldn't repay after a job loss, the outstanding balance is treated as an early withdrawal. You'll owe ordinary income tax on the full amount, plus a 10% penalty if you're under 59½.
On a $20,000 loan default in a 22% tax bracket, that's $4,400 in income tax plus a $2,000 penalty -- $6,400 gone, on top of the lost investment growth on that money. That said, the consequences of defaulting on a 401(k) loan are generally less severe than defaulting on other loan types. It won't affect your credit score, and there's no collections process.
