Learn about the ways to borrow from your employer-sponsored retirement plan, such as a 401(k) or TSP. Understand eligibility and tax implications to make informed decisions for your retirement.
Article: 7 minutes
Updated: June 4, 2026 Published: May 23, 2024
By: USAA Reviewed by: Editorial contributors
Borrowing from an employer-sponsored retirement plan can provide quick access to funds without immediate taxes or penalties if repaid, but it should be considered carefully because it can disrupt long-term retirement savings and carries risks if repayment rules aren’t met. Evaluating other funding options first and understanding loan terms, limits, and consequences is essential.
Unexpected expenses like a major car repair or hospital bill can be a major financial hit. It can be stressful to think about how to pay for these unforeseen costs. When financial difficulties arise, what are your options? There are some pros and cons of turning to your employer-sponsored retirement plan, such as a 401(k) or TSP, to cover unforeseen expenses, that you’ll want to weigh based on your personal financial and tax situation. Here are some of the most important considerations.
In addition to your retirement accounts, you may have other funds you can tap. To smooth out life’s financial road bumps, build an emergency fund. You could also consider a small personal loan. You might even be tempted to use a credit card. While that may seem like an easy solution, high interest rates can make it a costly one. Remember that balance rolls over month after month when not paid in full, accruing interest. The important thing is to consider all sources available to you before turning to retirement accounts.
Let’s get a quick refresher on purpose and tax benefits as you consider taking a loan from your retirement plan. The purpose of your 401(k) or TSP, also known as employer-sponsored retirement plans, is for your retirement. Their purpose sounds simple enough, but what you save for retirement is what will provide for your living expenses after you stop working, along with any pension income like military retirement, or other income sources such as Social Security.
The tax advantages of 401(k) and TSP plans serve as encouragement to help you save for retirement. In exchange for these advantages, there are also limitations and penalties when they’re not used for their intended purpose.
Both 401(k) and TSP plans can come in Roth and traditional versions. The difference lies in tax treatment. Check out this article to learn more about the differences between Roth and Traditional accounts.
Another advantage: Your employer might match your contributions to your retirement plan. Some view matching contributions as a way to attract and retain talented employees. The Department of Defense also matches contributions to the TSP for those under the Blended Retirement System, or BRS. Think of these matching contributions as free money — and a valuable way to help you achieve your long-term retirement goals.
Since the government provides tax advantages for certain retirement plans, there are some limitations on when you can access that money. In general, that age is 59 1/2. If you withdraw funds from a traditional qualified plan or the earnings of a Roth-qualified plan without a qualifying exception before age 59 1/2, you will face a 10% early withdrawal penalty, in addition to any income taxes you must pay on that money.
But there are exceptions that would allow you to withdraw the money early and penalty-free. To see if you qualify, check with the IRS.Opens new window You can access your Roth contributions, not the earnings, at any time since you didn’t get a tax deduction for those.
If you decide to use money from your employer-sponsored plan, it’s important to understand the distinction between withdrawing the money and borrowing it. When you withdraw money, you have no intention of paying it back. You’ll have to pay any taxes or penalties that come with taking out the money. When you borrow from your retirement plan, you won’t face taxes or penalties unless you don’t pay it back.
You can borrow from an employer-sponsored retirement plan, but you can’t take a loan from an individual retirement account like a Roth IRA or Traditional IRA. Not all employer plans offer loans, and they aren’t required to do so. Make sure to check what’s allowed with yours.
It’s also important to remember that when you talk about “borrowing” from your retirement plan, it’s actually a loan from yourself — and just like any other loan, it needs to be repaid. If you don’t, the IRS will treat it as a withdrawal from your retirement plan. You’ll owe the taxes and penalties that might be due.
For example, if you borrow $5,000 from your 401(k) but only repay $2,000, the IRS will treat the remaining $3,000 as a distribution subject to the rules that apply at the time of withdrawal.
It’s possible to withdraw money from a qualified plan and not pay a penalty, if it qualifies as a hardship distribution. The plan provider isn’t required to offer this option. But if they do, it must meet IRS guidance.Opens new window
The maximum amount the IRS allows to be borrowed from a qualified plan is 50% of the vested balance or $50,000, whichever is less. If 50% of your vested balance is less than $10,000, you may be allowed to borrow up to $10,000 (though plans are not required to offer this exception).
For example: If you have a vested account balance of $40,000, you could borrow up to $20,000. If the vested account balance is $15,000, you could borrow up to $10,000. Your employer’s plan may impose stricter limits, including minimum loan amounts or limits on the number of loans. If you have an existing loan, your maximum may be reduced based on the highest outstanding loan balance in the prior 12 months.
There are additional rules for how much you can borrow if you’re taking more than one loan out at a time. Make sure you understand which set of rules applies to you.
Yes, retirement plan loans charge interest. You repay the amount you borrow plus interest over time.
The interest is credited back to your own account, so in a sense you’re paying yourself rather than a lender. However, this doesn’t make the loan “free,” since repayments are made with after-tax dollars and you may miss out on investment growth while the money is out of the plan.
Interest rates are set by your plan (not the IRS), typically at a reasonable market rate. For example, TSP loans use the G Fund rate from the month before the loan is issued.
In general, you have five years to pay back a loan from your retirement account. If you’re using the loan for a primary residence, that timeframe may be extended. For example, the TSP caps a general-purpose loan at five years, but a loan to purchase your primary residence can be extended up to 15 years.
But what if you leave your employer, whether by choice or not, before you repay the loan? You no longer have five years. Instead, you must repay the loan by the due date of your federal income tax return, including any filing extensions. If you’d planned on a longer repayment schedule, you might be unpleasantly surprised by this unexpected bill coming due.
Your retirement account is a source of funds that’s available to you. While it might not be the ideal solution, it could be better than going into credit card debt or pursuing a payday loan. It’s definitely better than going hungry or losing a home to foreclosure.
You'll pay interest on a loan from your 401(k) or TSP, but you’ll be paying back that interest to yourself. Plus, the interest rate may be significantly lower than what you might pay for a personal loan or on a credit card.
Borrowing from your retirement account can be a quick way to access funds. It may take just a matter of days.
Each retirement plan can have different rules, but during the time the loan is outstanding, your employer might not allow you to contribute to your account. That also means you might miss out on employer matching contributions during that time. This can put you behind on achieving your retirement goals.
Borrowed money from your retirement plan means that money isn’t invested in the market, which could mean you miss out on any market gains during the loan timeframe. But if the market declines during this time, it might actually turn out for the better. We just never know.
If you don’t pay back the loan, it will be treated as a withdrawal from your retirement account.
The best advice is to have a robust emergency fund to help provide a cushion when life’s difficulties hit. But life can throw an occasional curveball that even Babe Ruth could not hit. In those situations, borrowing from an employer-sponsored retirement plan might be a good option to help you get back on track financially. Be sure to review all of your cashflow options before taking out a retirement plan loan.
Visit USAA's advice center for more advice and resources.