Skip to main content

What Happens If You Get Fired After Taking Out a 401(k) Loan?

Published February 20, 2020

4 minute read

Devon Taylor

By Devon Taylor

You may or may not already know this, but it’s possible to borrow from your own 401(k) retirement fund. It’s hardly ever a great idea, though. You’re really only taking away from your own financial future. The money you borrow is really already yours. Except once you borrow it, it will no longer be invested and earning a return. Plus you have to pay it all back anyway. So really, it’s best to avoid a 401(k) loan if at all possible.

However, let’s assume for the sake of this article that you’ve already listened to those warnings and decided you’re borrowing from your 401(k). Since your 401(k) is a saving tool offered exclusively through your employer, it begs the question: what happens to your 401(k) loan if you suddenly become unemployed?

Whether you resign, get laid off, or outright terminated for a suitable reason, that loan doesn’t go away. Here’s what you need to know.

What is a 401(k) Loan?

The Internal Revenue Service (IRS) allows you to borrow certain amounts from your own 401(k). The amounts start at $10,000 or one-half of the amount you currently have vested. Depending on your employers rules about how and when contributions are vested, this amount could vary a lot.

The maximum amount you can borrow is $50,000. Although you can take out multiple concurrent loans, the total amount of them combined cannot be more than this.

You’ll have to start paying back these loans immediately. There’s no grace period. Typical terms dictate that you must pay back every dollar within five years. There are, however, some longer terms available if you use the loan to buy a house.

Basically, if you need $10,000 right away (and have enough in your 401(k) account), you can get your hands on the cash right away. Then you pay yourself back over the next five years. For people who lousy credit, this can sometimes seem like a better option than a high-interest loan from a traditional source.

I Left My Job. Now What?

You might think, “Well I’m really just borrowing money from myself. So what’s the big deal if I keep it after I quit/got fired/whatever?” Unfortunately, it doesn’t work like that. The IRS insists that you still pay back the entire loan within the original term.

Plenty of people leave their jobs before the five-year mark. In fact, the medium job tenure in America works 4.2 years before leaving, according to the Bureau of Labor Stats. Obviously, if you are one of those people who don’t stick it out longer than 4.2 years (for whatever reason), having a five-year 401(k) loan is a bit of a problem.

If you simply can’t pay back the loan, the IRS switches it from a loan to a distribution. This means it counts as income, and is taxable. You’ll also have to pay a withdrawal penalty, meaning you get dinged twice for something that seemed simple at first.

The IRS will also allow you to roll the loan into a different retirement fund. However, the most popular alternative — the IRA — doesn’t offer a similar kind of loan. That means you’ll have to park the funds into a 403(b) or 457(b). If you find another job quickly that also offers a 401(k), you may be able to move your old loan into the new program. Then you can continue to make your normal payments.

How Long Do I Have?

These loans used to come with very stringent repayment terms. If you left your job, you had to repay the loan within 60 or 90 days. That was before the Tax Cuts and Jobs Act of 2017. Now, you have a little longer to scrounge up the repayment cash. The new deadline is Tax Day for the year you left your job. So if you left your job today, in 2020, you’d have until Tax Day of 2021 to repay an outstanding 401(k) loan.

Of course, if you lose your job in December, that’s a different story. You’d only have three and a half months to find new employment and get your loan repaid.

One Last Thing

Many 401(k) loans don’t have flexible repayment plans, even if you remain employed. The majority of them offer only two repayment solutions: stick with the regular payments over five years, or pay off the entire balance with a single payment. That means if you do find yourself with an unexpected windfall, you can’t even use it to make a dent in your outstanding loan amount.

Even if you feel very comfortable in your job security, a 401(k) probably isn’t the best way to get your hands on a lump sum of money. Remember, you’re going to need that money a lot more once you finally leave the workforce and retire. Instead, you should try to build up an emergency fund. If it’s too late for that, consider this article about when it makes sense to take money from a retirement fund. Sometimes it’s not actually as terrible a choice as you would think.

401 Note with Calculator and Change


Devon Taylor

Managing Editor

Devon is an experienced writer and a father of three young children. He's simultaneously trying to build college funds and plan for an eventual retirement. He's been in online publishing since 2013 and has a degree from the University of Guelph. In his free time, he loves fanatically following the Blue Jays and Toronto FC, camping with his family, and playing video games.

Explore Investing

Young tech professional with vested interest in his company Investing

Vested Interest: What Is It and How Do You Use It?

America is a leader in many things, but I’m not sure they should be proud of pioneering this particular thing. I’m talking about vested interest. (Or sometimes referred to as “golden handcuffs.) Plenty of companies use vested interest as a way to keep their employees from leaving. In some cases, people are delaying their own […]

Read More about Post Title

8 minute read

Vector illustration of stock investing Investing

How To Invest In Dividend Stocks (And Make Money)

One of the ways you can create a good revenue stream is to become involved in income investing. Income investing is all about making solid, relatively safe investment choices that actually produce regular income. This can include interest-bearing investments like bonds and some cash products. It can also include dividend stocks. If you’ve ever wondered […]

Read More about Post Title

8 minute read

stock market short seller Investing

How to Short a Stock: A Complete Guide

I first learned about short selling from my Dad. It was in the dot-com crash of the early 00s, when practically every investment was going down. Many people lost their savings because they plowed too much money into ridiculously-valued tech stocks. Looking back in retrospect, these stocks were already so high that they had no […]

Read More about Post Title

11 minute read

Man happy about investing Investing

What Are Bearer Bonds (and How Do They Work)?

A bearer bond is a fixed-income security, very similar to a regular bond. However, a bearer bond is owned by the holder (or bearer) rather than by a registered owner. The coupons for interest payments are physically attached to the bearer bond. The bondholder is required to submit the coupons to a bank for payment […]

Read More about Post Title

5 minute read


Amazon Stock: How to Buy and What to Consider

Online retailer Amazon is one of the biggest and best-known companies in the world today. Its popularity (and value) has only grown during the pandemic, as people all over the world were literally forced to shop online when retail stores were closed. Founded outside Seattle, Washington in 1994 as an online retailer of books, Amazon […]

Read More about Post Title

6 minute read

Safe investments for seniors Investing

The Safest Investment Options For Seniors

I heard a really interesting investing story recently. You see, a really close friend of mine invested in a cryptocurrency and was yield farming on what he thought was a relatively safe investment. He was doing really well for a few weeks in a row. However, someone found a way to abuse the ecosystem he […]

Read More about Post Title

10 minute read

See All In Investing

More from WalletGenius


How To Plan Your 2021 Christmas Budget

As much as I love gift-giving and the holiday season in general, I often find that it sneaks up on me. If you’re anything like me, you often find yourself in mid-December scrambling to get presents bought, wrapped, and even mailed. That last minute scramble often means paying more for gifts than you intended, since […]

Read More about Post Title

7 minute read

Financial Advice

How To Avoid Paying These Hidden Fees

One of my good friends is a financial planner. He recently told me something very interesting about hidden fees. He basically said that his income comes from the fees that he charges his clients. They are typically based on a percentage of the client’s assets. That means that every quarter (or annually), those fees are […]

Read More about Post Title

8 minute read

Financial Advice

How Do You Justify Your Debt?

Most of us are well aware how debt works. We know we shouldn’t buy things that we can’t afford. Instead, we know we’re supposed to save up for major purchases. It’s just smart financial sense to not make a bunch of purchases that drive up your debt. However, when it all comes right down to […]

Read More about Post Title

8 minute read

Woman stressed from overworking Financial Advice

Are You Actually Working Too Much?

Our society just idolizes “more” for some reason. We often talk about the mentality of “keeping up with the Joneses” in the context of material possessions often. However, I’ve noticed lately that people are just as impressed with those who seem to be “doing” more — and no, not doing more at work. We also […]

Read More about Post Title

8 minute read

Woman working on her finances Financial Advice

Easy Ways to Simplify Your Finances

“Life is really simple, but we insist on making it complicated.” – Confucius Personal finance is surprisingly simple. Live below your means. Invest for the long term. Keep at it. Prosper. Yet, we instinctively want to complicate the process because we can’t trust that something so important can be so simple. I mean, how can […]

Read More about Post Title

7 minute read

Flipping Houses Home Ownership

How to Start Flipping Houses (And Actually Make Money)

House-flipping is often portrayed as a foolproof path to quick riches. While this inaccuracy can create unrealistic expectations, flipping houses can definitely be profitable if you do it right. And that’s the trick: the people most successful at flipping houses are generally the most experienced. That said, they all started somewhere. There’s nothing like completing […]

Read More about Post Title

6 minute read

TSP Loans Loans

TSP Loan: Everything You Need To Know

TSP loans are specialized loans designed for employees of the United States federal government. They offer federal employees access to a unique loan class that uses their retirement plans to finance their borrowing needs. Financial advisors often liken them to the 401(k) loans available to members of the general public. Yet, TSP loans differ from […]

Read More about Post Title

5 minute read

Trusted provider of accurate rates & financial information