Can You Have More Than One 401k Loan?

A 401(k) loan provides a way for participants to borrow from their retirement savings, offering a source of funds without needing a credit check. The money borrowed is repaid with interest, which goes back into the participant’s own account. This unique feature often makes 401(k) loans an attractive option for short-term financial needs. A common question arises, however, regarding the possibility of having more than one such loan at a time.

Rules Governing 401(k) Loans

Federal regulations establish the primary limitations on 401(k) loans, setting parameters for how much can be borrowed. The maximum amount a participant can borrow is the lesser of $50,000 or 50% of their vested account balance. However, if 50% of the vested balance is less than $10,000, a participant may still be able to borrow up to $10,000.

This $50,000 limit applies across all outstanding loans from all employer plans, not per loan. If a participant has an existing 401(k) loan, the amount available for a new loan is reduced. The $50,000 cap is lowered by the highest outstanding loan balance the participant had during the 12-month period preceding the new loan request.

While federal rules permit the possibility of multiple loans up to the aggregate limit, individual 401(k) plans are not required to offer loans at all, and their specific terms can be more restrictive. Many plans, for instance, may limit participants to only one outstanding loan at a time, or they might impose stricter borrowing limits than the federal maximums. It is important for participants to consult their plan documents to understand the specific rules governing loans within their particular plan.

Beyond the maximum loan amounts, there are also federal requirements for minimum loan amounts and repayment periods. While there is no regulatory minimum loan amount, plans often set a minimum, such as $1,000, to prevent frequent small loan requests. For most general-purpose loans, the repayment period is limited to five years. However, if the loan is used to purchase a primary residence, the plan may allow a longer repayment period, up to 15 years or more.

Administration of Multiple 401(k) Loans

When a 401(k) plan permits multiple loans and a participant meets the federal and plan-specific borrowing criteria, the plan administrator manages these loans. Each loan is tracked separately within the plan’s recordkeeping system.

Repayment schedules are established for each loan, usually through payroll deductions. While payments are deducted from each paycheck, some plans may offer flexibility, allowing payments to be made via check or bank account. If an employee has multiple loans, separate deductions may be set up for each, or payments might be consolidated.

Interest rates for 401(k) loans are set at a reasonable rate, tied to the prime rate plus a small percentage, such as 1% or 2%. These interest payments are not paid to an external lender but are credited back to the participant’s own 401(k) account, reducing the overall cost of borrowing compared to commercial loans.

Upon termination of employment, if a participant leaves their job with one or more outstanding loans, the full unpaid balance becomes due. Plans require accelerated repayment by the due date of the participant’s federal tax return for the year they leave employment, including extensions. Failure to repay the loan by this deadline can lead to a default.

Loan Repayment and Default Scenarios

Repayment of 401(k) loans is facilitated through regular payroll deductions. These deductions continue until the loan is fully satisfied according to the amortization schedule. If a participant makes an additional payment or overpayment, the future scheduled payments might not change, but the loan will be paid off sooner.

If a participant misses a payment or otherwise fails to adhere to the loan terms, the loan can enter default, leading to what is known as a “deemed distribution.” A deemed distribution means the outstanding loan balance is treated as if it were a taxable distribution from the 401(k) plan. The entire outstanding balance of the loan, not just the missed payment, becomes immediately taxable income in the year of the default.

In addition to income tax, if the participant is under age 59½ at the time of the deemed distribution, a 10% early withdrawal penalty applies to the defaulted amount. Although a deemed distribution has tax implications similar to an actual withdrawal, it is not an actual distribution for all plan purposes and cannot be rolled over to another retirement account.

It is important to distinguish a deemed distribution from a “plan loan offset.” A loan offset occurs when a participant’s account balance is formally reduced to repay an outstanding loan upon separation from employment or plan termination. Unlike a deemed distribution, a plan loan offset is considered an actual distribution for rollover purposes, allowing the participant to roll over the offset amount to an IRA or another qualified plan to avoid immediate taxation and penalties, provided certain deadlines are met. A defaulted loan does not affect a participant’s credit score, as 401(k) loans are not reported to credit bureaus.