Do 401k Loan Repayments Count as Contributions?
Understand the critical difference between 401k loan repayments and actual contributions, and their effect on your retirement limits.
A 401(k) plan is an employer-sponsored retirement savings account. It allows employees to contribute a portion of their income, often with employer matching contributions, to save for retirement in a tax-advantaged way. A common question arises regarding how 401(k) loan repayments are treated, specifically whether they count as new contributions to the plan. This article clarifies the distinction between standard contributions and loan repayments within a 401(k) framework.
Understanding 401(k) Contributions
A “contribution” to a 401(k) plan refers to new money added to the account. These contributions generally fall into two main categories. Employee deferrals are amounts employees choose to have withheld from their paychecks and deposited into their 401(k) account. These can be made on a pre-tax basis, reducing current taxable income, or as Roth contributions, which are made with after-tax dollars but allow for tax-free withdrawals in retirement.
Employer contributions represent funds added to an employee’s 401(k) by their employer. These often include matching contributions, where the employer contributes a certain amount based on the employee’s deferrals, or profit-sharing contributions, which are discretionary amounts contributed by the employer. All types of contributions, from both employees and employers, are subject to annual limits set by the Internal Revenue Service (IRS). For example, in 2025, the employee salary deferral limit for 401(k) plans is $23,500, with an additional $7,500 catch-up contribution allowed for those aged 50 and older. The total combined employee and employer contribution limit for 2025 is $70,000, or $77,500 for those aged 50 and older.
The Nature of 401(k) Loan Repayments
A 401(k) loan involves borrowing money from one’s own vested account balance within the retirement plan. This is not a loan from an external lender, but temporary access to funds already part of the participant’s retirement savings. The amount typically available for borrowing is up to 50% of the vested account balance, with a maximum of $50,000.
When a participant repays a 401(k) loan, they are essentially returning the borrowed money to their own account. These repayments include both principal and interest, and the interest paid on the loan goes back into the participant’s own 401(k) account, rather than to an external entity. Loan repayments are made through regular payroll deductions over a set period, up to five years.
Impact on Contribution Limits and Account Balance
401(k) loan repayments do not count as new contributions for IRS limit purposes. This is because the money being repaid was already part of the participant’s retirement account before the loan was taken. It is a restoration of previously borrowed funds, not a fresh injection of new money into the retirement system. Therefore, repaying a 401(k) loan does not affect the annual limits on employee or employer contributions.
When loan repayments are made, they restore the borrowed funds, along with any interest, back into the participant’s 401(k) investment portfolio. This process rebuilds the account balance by replacing the withdrawn amount and adding the interest, which effectively goes back to the participant. In contrast, new contributions directly increase the account balance by adding fresh funds that have not previously been part of the retirement plan. While a loan repayment helps recover the account’s value, it is distinct from making a new contribution that utilizes the annual IRS limits for retirement savings.