No one opens and contributes to a workplace savings account like a 401(k) or a 403(b) expecting to need their hard-earned savings before retirement. But if you find you need money, and no other sources are available, your 401(k) could be an option. The key is to keep your eye on the long-term even as you deal with short-term needs, so you can retire when and how you want.
Loans and withdrawals from workplace savings plans (such as 401(k)s or 403(b)s) are different ways to take money out of your plan.
Lets look at the pros and cons of different types of 401(k) loans and withdrawals—as well as alternative paths.
Depending on your situation, you might qualify for a traditional withdrawal, such as a . The IRS considers immediate and heavy financial need for hardship withdrawal: medical expenses, the prevention of foreclosure or eviction, tuition payments, funeral expenses, costs (excluding mortgage payments) related to purchase and repair of primary residence, and expenses and losses resulting from a federal declaration of disaster, subject to certain conditions. Also, some plans allow a non-hardship withdrawal, but all plans are different, so check with your employer for details.
Cons: Hardship withdrawals from 401(k) accounts are generally taxed as ordinary income. Also, a 10% early withdrawal penalty applies on withdrawals before age 59½, unless you meet one of the IRS exceptions.
With a 401(k) loan, you borrow money from your retirement savings account. Depending on what your employers plan allows, you could take out as much as 50% of your vested account balance or $50,000, whichever is less. An exception to this limit is if 50% of the vested account balance is less than $10,000: in such a case, the participant may borrow up to $10,000.
Remember, youll have to pay that borrowed money back, plus interest, within 5 years of taking your loan, in most cases. Your plans rules will also set a maximum number of loans you may have outstanding from your plan. You may also need consent from your spouse/domestic partner to take a loan.
Pros: Unlike 401(k) withdrawals, you dont have to pay taxes and penalties when you take a 401(k) loan. Plus, the interest you pay on the loan goes back into your retirement plan account. Another benefit: If you miss a payment or default on your loan from a 401(k), it wont impact your credit score because defaulted loans are not reported to credit bureaus.
Cons: If you leave your current job, you might have to repay your loan in full in a very short time frame. But if you cant repay the loan for any reason, its considered defaulted, and youll owe both taxes and a 10% penalty on the outstanding balance of the loan if youre under 59½. Youll also lose out on investing the money you borrow in a tax-advantaged account, so youd miss out on potential growth that could amount to more than the interest youd repay yourself.
Many Americans have considered borrowing from their 401k retirement account at some point. With rising costs of living and unforeseen expenses tapping into your retirement funds can seem tempting. However there are risks and downsides that come with taking a 401k loan. One common question is will borrowing from my 401k negatively impact my credit score?
The short answer is no – a 401k loan will generally not hurt your credit score directly. This is because 401k loans are not treated like traditional loans or debts. They do not require a credit check or get reported to credit bureaus. However, there are some indirect ways that a 401k loan could potentially affect your finances or creditworthiness down the road.
How 401k Loans Work
Before diving into the credit implications, it helps to understand what a 401k loan is and how it differs from other types of borrowing
A 401k plan allows you to take a loan from your own retirement account up to certain limits set by the IRS. Typically you can borrow up to 50% of your vested 401k balance or $50,000, whichever is less. The loan terms are set by your employer’s plan.
Importantly, you are borrowing your own money that you’ve already contributed to your 401k. You pay the loan back to your account, with interest, via payroll deductions. The interest also goes back into your 401k balance.
Unlike banks or lenders, 401k plans do not check your credit or report the loan to credit bureaus. There is no credit check or credit reporting involved. That is a key reason 401k loans don’t directly impact your credit.
Why 401k Loans Don’t Affect Your Credit Score
When you take out a traditional personal loan or use a credit card, these show up on your credit report and factor into your credit score. 401k loans work differently – they never appear on your credit report. Here’s why:
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No credit check – 401k loan approval is based on your account balance, not creditworthiness. So no inquiry gets recorded by credit bureaus.
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Not reported as debt – The loan stays internal to your 401k. External creditors and lenders can’t see it.
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No payment history – You repay the loan via payroll deduction. On-time repayments are not reported to help your credit score.
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No default damage – If you fail to repay and default, it does not show as a defaulted loan on credit reports.
In short, 401k loans exist outside of the credit reporting system entirely. They do not affect amounts owed, credit history, or any other factor in credit score calculations.
When Could a 401k Loan Indirectly Impact Your Credit?
While 401k loans don’t directly appear on your credit report, there are some scenarios where they could indirectly hurt your creditworthiness:
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Financial hardship from default – If you default on the 401k loan, you will owe income taxes and penalties. This financial burden could make it harder to pay other debts or bills, causing damage to your credit.
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Halted retirement contributions – You might pause new 401k contributions while repaying the loan. This reduces new savings and growth potential.
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Job loss before repaying – Leaving your job triggers quick repayment requirement. If you can’t repay in time, the loan defaults.
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Less savings to draw from – Taking money out of investments means less savings accumulated. In the future, you may need to rely more on credit.
The common theme is that while a 401k loan itself doesn’t show up on your credit report, the downstream effects of borrowing from your retirement funds can sometimes impact your finances and credit health indirectly.
Pros and Cons of 401k Loans
Below is a quick recap of the key pros and cons related to how 401k loans might affect your credit and finances:
Pros
- No credit check or credit reporting
- Interest paid goes back into your 401k
- No risk of collections or credit damage
Cons
- Lost 401k investment growth while borrowed
- Tax/penalty risk if default after leaving job
- May pause new 401k contributions
The takeaway is that a 401k loan lets you access cash without a direct credit score hit. However, the tradeoff is putting your long-term retirement security at risk. Make sure you carefully weigh the pros and cons before deciding to borrow from your 401k.
Alternatives to 401k Loans
Other options beyond borrowing from your 401k include:
- Personal loans from a bank – Will affect credit but may offer better rates and terms
- Credit cards – Can provide short term access to cash but high interest
- Home equity loan – Lets you tap home equity without credit damage
- Hardship withdrawal – Permanent distribution from 401k that triggers taxes/penalties
Each option has its own pros, cons, and credit implications to weigh carefully before moving forward. Many financial advisors recommend exploring all alternatives before turning to your retirement funds.
The Bottom Line
Will a 401k loan hurt your credit score? No, it will not directly appear on or negatively impact your credit report or scores. But that doesn’t mean 401k loans are risk-free or the right financial move. There are scenarios where borrowing from your retirement account could hurt your overall finances or creditworthiness indirectly later on.
If you use a 401k loan wisely and have a solid repayment plan, you can avoid credit damage and costly consequences. But proceed with caution, as 401k loans come with their own pitfalls. Only use them as a last resort and with a full understanding of the tradeoffs involved so you can make the smartest decision for your situation.
Immediate impact of taking $15,000 from a $38,000 account balance
These hypothetical examples compare taking out a 401(k) loan and a hardship withdrawal to cover an after-tax expense need of $15,000. Assumptions include a 10% federal tax withholding, 5% state tax withholding, and a 10% early withdrawal penalty, for a total of 25%. Given the listed assumptions, the comparison illustrates taxes and penalties incurred when taking out as a loan, which amounts to 0. Therefore, a total of $15,000 is taken out from the loan scenario. For the hardship withdrawal scenario, a total of $20,000 is taken from the account so that 25% ($5,000) of the withdrawal is set aside for tax withholdings and penalties, and the remainder ($15,000) is received, leaving $18,000 in remaining balance. These hypothetical examples are for illustrative purposes only. Specific tax withholding rules are plan- and state-dependent. You also have options to elect different withholding percentages. Taxes can be paid at the time of your tax return if you elect to withhold 0%. Make sure you set money aside to pay for this portion.
Is it a good idea to borrow from your 401(k)?
Using a 401(k) loan for elective expenses like entertainment or gifts isnt a healthy habit. In most cases, it would be better to leave your retirement savings fully invested and find another source of cash.
On the flip side of whats been discussed so far, borrowing from your 401(k) might be beneficial long-term—and could even help your overall finances. For example, using a 401(k) loan to pay off high-interest debt, like credit cards, could reduce the amount you pay in interest to lenders. Whats more, 401(k) loans dont require a credit check, and they dont show up as debt on your credit report.
Another potentially positive way to use a 401(k) loan is to fund major home improvement projects that raise the value of your property enough to offset the fact that you are paying the loan back with after-tax money, as well as any foregone retirement savings.
If you decide a 401(k) loan is right for you, here are some helpful tips:
- Pay it off on time and in full
- Avoid borrowing more than you need or too many times
- Continue saving for retirement
It might be tempting to reduce or pause your contributions while youre paying off your loan, but keeping up with your regular contributions is essential to keeping your retirement strategy on track.
Does 401K Loan Impact Credit Score? – CreditGuide360.com
FAQ
Does borrowing from a 401k affect credit score?
Does a 401k withdrawal affect your credit score?
Is it smart to borrow from a 401k to pay off debt?
What is the downside of borrowing from a 401k?
While you’ll pay yourself back, you’re still removing money from your retirement account that is growing tax-free. And the less money in your plan, the less money that grows over time. Even when you pay the money back, it has less time to fully grow.Mar 28, 2025