401(k) Loan

A 401(k) loan is taken from the assets within a 401(k) account and charges interest, which is typically paid back through payroll deductions. If the borrower leaves their employer before the loan is repaid, the entire loan amount is usually due immediately. If the borrower fails to repay the loan, it is treated as a distribution, triggering ordinary income tax obligations and any applicable tax penalties.

However, under the Tax Cuts and Jobs Act, borrowers do not have to pay taxes or penalties if they repay the loan by the due date for their tax return for the year in which they leave their job (including extensions). For example, if someone leaves their job in 2025, they would have until April 15, 2026, to repay the loan without incurring taxes or penalties.