401(k) Loan Tax Implications Guide for Plan Borrowers (2026)
Understand 401(k) loan tax treatment: loan limits, repayment requirements, default taxation, and separation-from-employment tax consequences.
Summary
401(k) loans have specific tax rules and risks. This guide explains borrowing limits, repayment, and default tax consequences for plan participants.
Key Steps
- 1Understand loan limit: 50% of vested balance or $50,000 maximum.
- 2Track repayment timeline: 5-year maximum, quarterly payments required.
- 3Monitor separation risk: loan becomes taxable distribution if leave employer.
- 4Calculate default tax: unpaid balance treated as early distribution (10% penalty if <59½).
- 5Document loan purpose: no tax deduction for 401(k) loan interest.