Definition
A loan you take from your own 401(k) balance, if the plan allows it, and repay with interest through payroll deductions, usually over up to five years. The interest goes back into your account, but the borrowed money is out of the market while you repay it, and leaving the job can make the whole balance due quickly.
Why it matters
It is cheaper than a credit card and involves no credit check, but the hidden cost is missed growth. An unpaid balance after a job change is treated as a distribution: taxed as income plus the early withdrawal penalty if you are under 59½.
Example
An employee borrows $10,000 from a $60,000 balance at 6% over five years, about $193 a month deducted from pay, and the roughly $1,600 of interest lands back in their own account. The catch: a layoff after two years leaves about $6,350 unpaid, and if it is not repaid by the deadline it becomes taxable income plus a 10% penalty for anyone under 59½.
Put it into practice
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.