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Changing jobs can be exciting. But what if you have a 401k loan? This article looks at whether you should borrow money to repay a 401(k) loan when you change jobs?
One feature of many 401(k) retirement plans is that you can borrow money from your own account. Regulations don’t require that 401(k) plans offer this option. But many do.

Financial gurus have written a lot about the pros and cons of 401(k) loans. It’s still a hotly-debated topic. One of the biggest potential drawbacks comes into play if you leave your job while you still have an outstanding loan from your 401(k) plan. So today, let’s take a look at what happens when you pull money from your 401(k) and whether you should borrow elsewhere to return the funds to your retirement account.

Leaving a Job With an Outstanding Loan

While many financial advisors would recommend (with a passion) that you never borrow money from your retirement plan, the fact is that it happens. Sometimes, an opportunity may present itself that warrants the 401(k) loan. Other times, you may make the choice out of sheer necessity. After all, a 401(k) loan is typically smarter than other “quick cash” options like payday loans.

If you’re considering a loan, know that you’re not alone. In fact, according to a 2014 study by the Employee Benefits Research Institute, 21 percent of employees who were eligible for a 401(k) loan had one outstanding. With so many people owing money back to their retirement plans, though, there’s the potential for an issue.

The biggest problem, as mentioned, is when you leave your job and haven’t paid the loan back in full. This may be because a better opportunity presents itself and you choose to change jobs. Or it might be because you are laid off or fired.

When this happens, you generally have two options: (1) pay back the loan in full within 60 days, or (2) …don’t.

If you follow option two, just know that the IRS will treat the loan as an early withdrawal from your 401(k) plan. With very few exceptions, they will then smack you with a 10% penalty on the outstanding loan amount and also require you to pay taxes on the distribution. Thus, you could easily end up paying 30% or 40% of the outstanding loan amount in penalties and taxes.

It goes without saying that failing to pay back the loan within the allotted time period can be a very costly decision.

How to Pay It Back Quickly

The problem that often arises is that folks want to pay back the 401(k) loan within the 60-day window. But they simply can’t afford to do so. This is particularly true in difficult economic times or when someone is unexpectedly let go from their job without time to financially prepare. In either case, borrowers often lack the available funds to repay the loan in the 60-day period.

That leads us to an important question: Should you borrow to repay a 401(k) loan?

The short answer, in my opinion, is absolutely yes. And to my surprise, it’s also Dave Ramsey’s advice. And we all know how much he preaches against non-mortgage debt.

It may seem a little like borrowing from Peter to pay Paul, but it has its merits. With the taxes and penalties you’ll owe if you don’t repay the 401(k) loan right away, the cost will almost always be greater than the cost of a short-term personal loan at reasonable rates. In addition, by not repaying the 401(k) loan, you will forever remove that money from your retirement investments. Thus you’ll lose the tax-deferred return on your 401(k) investments forever.

Where to Borrow

Of course, one big question still remains. Where should you look to borrow money to repay a 401(k) loan?

Here are a few places to look if you need to quickly return borrowed funds to your retirement account before being hit with fines and penalties:

  • Home Equity Line of Credit (HELOC): Perhaps the first option would be to tap into a home equity line of credit. Equity lines generally come with reasonable interest rates and are easy to access if you have some equity built up in your home.
  • 0% Balance Transfer cards: Another potential option is to take advantage of one or more 0% balance transfer offers. Before going this route, however, make sure you can pay off a 401(k) loan balance with the balance transfer card(s). Depending on how much you borrowed, you may still come up short. Also keep in mind that the introductory rate periods are frequently as low as six months. After that, the interest rates adjust to whatever regular APR applies to the card. That can be as high as 20-30 percent! This option is best if you can repay the money transferred well before the introductory APR expires.
  • LendingClub: A popular peer-to-peer lending source, LendingClub offers unsecured loans up to $25,000. Depending on your credit history, credit score, and other factors, you can obtain a loan at a reasonable interest rate. All loans must be repaid over three years, although you can choose to pay off the loan sooner.
  • Unsecured Line of Credit: You can obtain unsecured lines of credit from most banks and credit unions. Interest rates will vary significantly based on your credit history. I have an unsecured line at Citibank that I rarely use, but it does come in handy for short-term loan needs.

So, what’s your take? Should you borrow to repay a 401(k) loan if you don’t have the funds available to repay the debt?

Author Bio

Total Articles: 1083
Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Article comments

59 comments
varunee browder says:

I had borrowed from my 401 k to pay my high interest credit card during my husband secound laid off for 11months, with 2 childrens in school, we depleted our saving.I need to pay some of my high interested credit cards off, so I can affort to make other payment and take care my family. I did have plan to change job, so i called the company 401 plan and the adviser told me that I can continue to make the payment by set up the checking acct. so they can withdraw from them each month automatic.When i change the job, and i did what I was told, the 401k plan send me the paper that I need to pay off total amount with in 2 months, otherwise i have to pay the tax and penilty, and they siad they are sorry that their employee gave me the wrong advised. My ignorant and trust to the company’s financial adviser that they know what they doing bacause I don’t.I have fairly decent education and like to prepare ahead,what about other people whom don’t have that opportunity? I hope the government understand that some people work hard to make a living honestly never get the break. why is that?

Denise says:

Hi Rob,
I wanted to let you know that we offer a service/solution for 401K loans to avoid taxes and penalties. The solution will not apply to everyone who has a 401K loan but for those that do, we can save thousands of dollars. For more information or to contact us, 401K loan holders can visit my website http://www.401kloantransfer.com.

Thank You
Denise

Denise says:

Hi Rob,
I wanted to let you know that we offer a service/solution for 401K loans to avoid taxes and penalties. The solution will not apply to everyone who has a 401K loan but for those that do, we can save thousands of dollars. For more information or to contact us, 401K loan holders can visit my website http://www.401kloantransfer.com.

Thank You
Denise

Denise says:

Hi Rob,
I wanted to let you know that we offer a service/solution for 401K loans to avoid taxes and penalties. The solution will not apply to everyone who has a 401K loan but for those that do, we can save thousands of dollars. For more information or to contact us, 401K loan holders can visit my website http://www.401kloantransfer.com.

Thank You
Denise

Debbie stanovcak says:

My husband left a job with an outstanding 401kloan. The company took the amount owed on the loan from his 401kloan account to pay off the loan.Why?

Jim says:

“Debbie stanovcak says:
June 30, 2015 at 10:52 am
My husband left a job with an outstanding 401kloan. The company took the amount owed on the loan from his 401kloan account to pay off the loan, why?”

What? What you are saying doesn’t even make sense.
The company your husband worked for used money from his 401k account to pay off his 401k loan? Hardship loan maybe? I mean, come on, you HAVE to have more information than this.

Mike says:

Thank you for this article, very helpful.

I’m going to a different job and have a $25,000 401k loan. After much research, I believe these are the best two options:

1. Rollover my 401k loan to new company. Take a loan from that 401k plan to pay off the old 401k loan.

2. Take a $25,000 home equity loan and pay off the old 401k loan.

Anyone have experience considering these 2 options and then deciding on one? Curious to see what others think is best. They both sound like good options to me.

Thank you!

jamey beavers says:

Debbie what your saying makes perfect sense. Where i work you can borrow up to half of what you have in your account so the other half is like collateral if you leave the company.

Chris Watson says:

This is not correct. The money you borrowed from your 401k is your money whether you pay it back or not. If not you are subject to the tax penalty and regular taxes as if you had received that same money as income. There is no way that any employer can take money from your 401k to satisfy a loan that you have taken from the 401k. You have not borrowed from the employer. You have borrowed from yourself. This should be investigated as a legal problem. Its not collateral at all. That is not how a loan from 401k works.

Terry says:

So how does that work? If the company takes the money from your 401k to pay your loan, the loan was to yourself, so does that money go back into the 401k, In other words do you still have that amount from the loan back into your 401k?

Stephanie Colestock says:

Terry,

If you take out a 401k loan, it will come directly out of your 401k (tax-free) and be paid out to you. Then, you will repay it over a period of time back into the 401k — but you’ll also pay yourself interest on the loan (which also goes into your 401k account). So, yes, you’ll still have that money in the end (plus interest) after you finish repaying the loan.

PatrickOHara says:

Hi I have a 401k Loan w Wells Fargo can I just setup my next employer to deduct loan payment amount until its paid off?

Tired-Tried says:

I received a 1099R this year for a loan I took out in 2016. The employer did not pay anything on the loan but they did and are still taking money out of my check. They are also taking money out for my 401K weekly but have only made 1 payment this year. Its sad when people lie cheat and steal.

George says:

I am leaving my job ,my company didn’t match my 401k all funds deposited we’re from my pay.I took out a loan but I found another job what do I do about the loan?

Christian says:

Debbie,
What it sounds like to me is that your husband was not fully vested so they took their part of the 401k matching back.

Karen says:

Hello, I was looking to see if my questions was already answered here, but it was not quite clear. So I took out a 401k, if I leave my company can the loan be deducted from the positive balance from my 401k. For example, I took out t $6,000 loan and my current balance is $46,000. So could they just distribute or roll-over $40,000? Thanks.

Stephanie Colestock says:

Karen,
Unfortunately, you will actually need to pay back what you borrowed against the 401k. It cannot simply be deducted against your balance without penalty.

Typically, you’ll have 60 days after leaving the company to repay the loan in full if you want to avoid it being counted as a taxable distribution (which would then be reported on a 1099-R). If you’re younger than 59.5, you’ll also have to worry about an additional penalty (of 10%) for taking an early distribution, if you don’t pay it back before the deadline.

Best, Stephanie

Michelle says:

I had a similar question. So in the same instance, would a withdrawal be possible with an outstanding loan balance?

Veronica says:

So I quit my job and was paying back on a 401k loan, I have almost $900 more in my 401k account than what I owe, I am going cash out on it because of my new job I don’t get paid until 45 days after I started and need the cash. My question is when i cash out will I get my full amount in my account or will they deduct what I owe on my loan and give me the almost $900 that’s left after the loan ? And what penalties will that cause during income tax time ? T.I.A !

Rose says:

So, I took a 401k loan (almost paid off), than recently just lost my job. Would I still be able to cash out??? If so,what is the penalty???

Rob Berger says:

Rose, typically if you cash out a 401k before you are 59 1/2, you pay a 10% penalty + taxes. There are exceptions to this rule, however, so you should consult a tax professional before making a final decision.

Po kao says:

Hi Rob, I just borrowed $1100.00 from my 401k and I had a job offer wich make better pay the my old job and I excepted the new job. Can I still withdraw the other half if I try to roll over my 401k to 403b?

K says:

Veronica, they will deduct what you owe and that $900 will probably be eaten up by penalty fees for not paying back the loan. Basically transforming it to a withdrawal. Then you will have to claim the amount leftover on the loan as income so you will be taxed again depending on your tax bracket.

Vaughn says:

I have a question and I hope someone can answer it. I plan on leaving my job mid December next year after I am out of school. I will still owe around 1800 on my 401K, and I should have around 6000 in my 401K around the time when that comes, as well was over 3000 in My profit sharing plan. The plan is to start my own business and cash out the rest of the money from the 401K and profit sharing plan to live off of while I get everything off the ground. By that point in time I should probably have 3 or 4000 in my savings account. Should I pay off the loans and then cash out the 401K and profit sharing or just have them deduct the remainder and take their cut?

Antonio says:

I am planning to quit my job before the end of the year and I still owe my 401k $5k from the $10k that I borrowed and I don’t think I will be able to pay the $5k i owe before I quit my job. Can I cash out my 401k money which about $50k even if I don’t pay the $5k that I still owe?

Rob Berger says:

Antonio, my guess is they will deduct what you owe before cashing you out, but your HR department or 401k plan administrator will have the answer. Keep in mind that if you cash out a 401k, you may owe a 10% penalty (depending on your age and other circumstances) and taxes.

Antonio says:

Thank you Rob,
You think they will deduct the exact amount i currently owe or will they add additional charges? Or some kind of penalties?

Paul H says:

Are there any special considerations when the “new” company uses the same brokerage to manage the 401k? I’m about to give notice to company #1 to accept a position with company #2 – and they both use Fidelity to manage their 401k accounts. Can’t I just leave the loan in place with Fidelity, and transfer both the account balance and the loan “in place”? It’s not like I’m taking possession of the funds – they’re staying in place!

Rob Berger says:

While I would certainly ask, I don’t believe so. I think it’s tied to your employer. But again, Fidelity should be able to answer your question for certain.

Stan says:

I have a an approximate $20K loan from my 401(A) account from my previous employer. If I “roll-over” my 401(A) from the previous employer to my new employers 401(A) plan , how is the loan handled? I do not think i can afford to pay it off before the roll over deadline?, Depending on interest rates i qualify for, should i take a loan to pay it off first before rolling it over?

Nicole says:

So my company was not sold but it merged with another company under a new name. As of the first of the year we will have a new 401k company we will have to use.
My question is: I have a loan through my 401k… will it rollover to my new 401k and will just make payments to them? NO ONE at this company seems to know the answer!!!

Ruben Rojas says:

Yes, this happened to me and it just rolled over. I’m paying it back to a new 401k company. Went from fidelity to empower retirement.

Sam says:

Hello,
I am planning to find another job, out of state. But I borrowed money from my 403b and still owe around 16,000. Could you help me figure out whats the best thing to do. I want to have a retirement account but I also want to build a ***6 months emergency fund*** Please help.😩

Lan Nguyen says:

My company closed and I still own $3.500 in 401k Loan . I have no money to pay off now .
And my new company have 401k .
What can I do now ?

Jon says:

I have 401k from my former employer that I left 3 months ago. I needed to borrow money for an emergency situation so I looked into my 401k plan and they had an option to borrow as a loan or withdraw funds. Obviously I chose the loan option because it’ll give me time to pay it back with minimal interest and no penalty. Well it turns out I shouldn’t have been allowed to borrow as loan because im no longer an employee and TD is telling me its considered a withdrawal and I have to pay it back full in 60 days plus penalty. I have not received the check yet and they would not allow me to cancel the request. What are my options? I dont want to pay penalty and taxes.

DA says:

If your starting a new job that really wants you. Ask them to pay off your 401K loan and set up a payment plan with them to pay back the loan.

Barbara says:

Pay back the loan with the money from the check. Deposit it to your bank account then send it back to the 401k loan.

jim says:

Its actually not a legal requirement that 401k loans have to be repaid when you leave the company. My employer does not require immediate repayment. For me the #3 option is to continue to simply repay the loan as per the loan terms.
Check your 401k plan loan details to see IF repayment at termination is actually a reuirement. I suspect its a typical requirement since everyone seems to think this is the ‘rule’. But there are exceptions.

Randy R says:

I have a loan on my 401K the quesition I have is when the payment to the loan is paid from my Bi-Weekly paycheck the amount of the payment comes out after taxes so I’m paying taxes on the money I pay back them I will be taxes again when I draw it out for retiremnet?

Rob Berger says:

Yes, that’s correct.

Eric says:

I owe 3k on my loan with current employer. I have plans on going on to a new job. I understand that I have 60 days to pay the loan back. My question is can I use my rollover 401K money to pay my existing loan? Also can I have the financial institution take out the takes that I would owe if I decided to cash a portion of it out?

Veronica says:

I am following this thread as I have the exact same situation and questions. Can anyone help answer?

Katie Wellington says:

My husband took out 15,000 from his 401K, then was laid off.. can he A. have the repayment come out of our direct acct or B since we are rolling our 401K’s into one, could they take repayments out of his checks from a new job or mine?

Be Tu says:

This article needs to be updated. Because for the new tax laws a loan balance has up to mid October of the next year before it has to be paid off in full

Michelle says:

Can you comment further on your statement? What are the new laws?

Shannon says:

This is under the new tax law that the Trump administration enacted for 2018. This allows you to pay back the loan by the due date of your return including extensions, so if you file an extension you would have until October of the next year to repay.

TH says:

I’m interested in this information as well since the tax laws allowed for more flexibility in 2018 for repayment of loans

Carl says:

Yes, can you comment on the new tax law about payment on a 401k loan not being due til Oct of 2019? And, where might we find a link that explains it? Thanks so much.

Costas says:

If the new employer offers 401(k) and you are transferring the plan to the new employer, can you also roll-over the loan and continue paying regularly the new employers plan?

Barbara says:

No, you would have to repay the loan, transfer the 401k to the new employer, then take out a new loan if they offer loans with the new 401k.

Jeremy says:

Barbara, some employer sponsored 401k plans will accept a 401k rollover with an outstanding loan.

jef says:

Is it 60 business days to repay the loan?

christine geraghty says:

I have a 401k loan also. I want to look for a new job but because of this am afraid to. However, when I had left another job years back they said I can leave the 401k right where it is. So why not not do a rollover, leave the 401k with the old company and just keep paying out of your check. just transfer the auto pay to your new employer. done. Let me know if that is an option

Brian K Johnson says:

I left my employer last qtr 2018 and defaulted on a loan. My medical insurance was through employer so we got an O care subsidy. The amount of default caused increased income and the Fed wants the subsidy back. If I repay the loan before tax day 2019, will the subsidy payback requirement be rescinded?

Kathy says:

I have a question? Hoping someone can answer it? I recently got offered a new job, but I have a 401k loan that I need to pay back. My job is telling me that I cannot leave the company until it’s paid or I will be filed the pentalty cost in taxes of the 401k. So instead they are telling me to cash out all my vacation days and work for them 1 day every weeks to help pay for the loan, so I would basically be working for them for free and working to pay that loan? Is there another option since my new job does offer me a 401k? Or do I have to work my job until the loan is paid?

Tim says:

You can leave the job anytime. By law, you have until your tax return due date April 15, 2020 to repay the loan. You can get a new job, rollover your 401K to your new job, take a new 401k loan and repay the old loan.

Don Perry says:

They can’t hold you hostage. Your 401K is between you and the investment agency. I’m not a financial professional but I know they can’t force you to keep working for them to repay the loan.

Joseph Delaney says:

This seems like repetition of the same status quo we’ve been indoctrinated with since the inception of the financial industry. Unless you have tremendous skill with financial markets, consider what I’m doing. Converting the 401k to an IRA and withdraw enough of the IRA to pay for penalty and taxes on all of the above. I may withdraw the remaining balance and put into my Roth so it can grow tax free. I will be putting the funds I withdraw in a savings account I do not allow myself to touch with a credit union. I’m not a qualified investment professional though.

Jolene Rowland says:

Ok……my question is my husband was working for a company and has 2000.00 in. 401k. He has another 5000.00 in a different 401 and is now starting a new job, my question is if he can just cash out on those two and start a new one with this new company?