OVERVIEW
- 401k loan interest rates are typically tied to the bank prime rate with an added margin, usually around 1–2%.
- Plans may charge origination or maintenance fees, and the exact amounts are listed in plan documents like the Summary Plan Description (SPD).
- A 401k loan isn’t taxed when you take it, but repayments are made with after-tax dollars. Later withdrawals from a traditional 401k are taxed as ordinary income.
A 401k loan lets you borrow directly from your retirement savings without triggering an early withdrawal penalty. The maximum loan is the lesser of $50,000 or 50% of your vested balance, reduced if you already had another loan in the past 12 months.
Here’s everything you need to know about a 401k loan’s interest rates, taxes, and fees.
What Are the Interest Rates on a 401k Loan?
401k loan interest rates must be “reasonable” under Department of Labor rules. In practice, that means they should be similar to what a bank would charge for a comparable secured loan.
Many plans benchmark the bank prime rate and then add a small margin, usually around 1–2%. There is no legal requirement to use “prime + 1–2%,” but it is a common practice.
✏️ Hypothetical Example:
In late 2025, the prime rate reported by major U.S. banks was about 7.25%. A plan that uses “prime + 1–2%” would set rates around 8.25%–9.25%. Your actual rate depends on the terms in your plan documents.
📝 Note: Interest on a 401k loan is not a “fee” that goes to your provider. Instead, repayments include both principal and interest, and the interest is credited back into your account.
What Is a Prime Rate?
The prime rate is the interest rate banks charge their most creditworthy borrowers. It is widely used as a benchmark for loans, credit cards, and lines of credit.
Banks typically give the prime rate to borrowers with the highest credit scores. Others may be charged prime plus a higher margin depending on their creditworthiness and the type of loan.
No Creditworthiness Required for a 401k Loan
A key difference with 401k loans is that there is no credit check. The plan does not pull your credit history, and the loan doesn’t appear on your credit report.
✅ Interest rates are the same for everyone in the plan, regardless of credit score.
❌ If you miss payments, your credit score is not directly affected. Instead, the unpaid balance may be treated as a taxable distribution from your 401k.
What Are the Fees on a 401k Loan?
The fees on a 401k loan depend on your plan provider. Check your plan’s Summary Plan Description (SPD) and fee disclosures for exact amounts. Common charges include:
- Origination fee: Many plans charge a one-time loan origination fee, often ranging from $50 to $100.
- Maintenance fee: Some plans also add ongoing loan maintenance or recordkeeping fees, which can range from $25 to $50.
In total, fees are often between $75 and $150, though your plan’s specific schedule will provide the final amounts.
What Are the Taxes for Taking Out a 401k Loan?
A 401k loan itself is not considered taxable when you borrow it. However, the repayment process has tax implications:
- After-tax repayments: Loan payments must be made with after-tax dollars. You cannot deduct those repayments from your taxable income.
- Taxable withdrawals later: If the loan came from a Traditional 401k, any future withdrawals in retirement are taxed as ordinary income under the plan’s distribution rules.
- Double taxation concern: This setup can feel like being taxed twice—once when using after-tax dollars to repay the loan, and again when paying income taxes on withdrawals in retirement.
What Happens If I Miss Interest Payments?
If you miss payments on a 401k loan, the impact is not on your credit score but on your taxes:
- Taxable distribution: The unpaid balance is treated as a deemed distribution, which means it becomes taxable income in that year.
- Early withdrawal penalty: If you’re under age 59½, the IRS generally applies a 10% additional tax on top of regular income tax.
- No credit bureau reporting: Plan loans are typically not reported to credit agencies, so your credit score is not affected.
✏️ Hypothetical Example:
If you borrowed $50,000 and defaulted, the unpaid balance would be considered taxable. If you’re under 59½, you could face a $5,000 penalty plus income taxes based on your tax bracket.
What Is the Due Date for Repaying a 401k Loan and Interest?
- Standard repayment term: Most 401k loans must be repaid within five years, with level payments made at least quarterly.
- Home purchase exception: If the loan is used to buy your primary residence, the repayment term may be longer. The exact maximum is set by your plan.
- Leaving your job: If you quit or are terminated, the outstanding balance is usually due sooner. You must repay or roll over an equivalent amount by the due date of your federal tax return, including extensions. For example, if your loan is offset in 2025, the repayment deadline would generally be April 15, 2026, or October 15, 2026 if you file an extension.
Key Takeaway
A 401k loan can give you temporary access to your retirement savings, but it comes with rules, fees, and tax implications. Interest payments go back into your account, but repayments are made with after-tax dollars. Missing payments or leaving your job without repaying on time may trigger taxes and penalties.
If you’re weighing this option, consider:
- How the repayment schedule fits into your budget
- Whether the interest rate and fees are manageable
- The impact on your long-term retirement savings
It may also help to review your plan’s specific loan terms and compare them with other borrowing options before making a decision.
Disclaimer:
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