A 55-year-old with $800,000 in a 401(k) who borrows $50,000 from the account to cover a home repair, tuition bill, or cash shortfall and repays it over five years faces costs that go well beyond the loan’s stated interest rate. The true cost is higher than it appears.
The Three Layers Most Borrowers Miss
The first layer is opportunity cost. Money taken out as a loan is no longer invested in the market. A $50,000 loan at a 7% average annual return can easily cost $12,000–$14,000 in forgone growth over five years. That amount represents the compounding the money would have earned had it stayed invested.
The second layer is the double taxation on the interest you pay. Loan repayments are made with after-tax dollars, and when you eventually withdraw those funds in retirement, they are taxed again as ordinary income.
The third layer is job-loss risk. If you leave your job or are laid off while the loan is outstanding, the remaining balance usually becomes due right away. Under SECURE 2.0, the repayment window is extended to your tax return due date (including extensions). For someone who separates in early 2026 and files with an extension, that deadline could be October 2027. Still, a newly unemployed borrower is unlikely to have $30,000 or $50,000 readily available. If the loan cannot be repaid, the outstanding balance becomes a taxable distribution subject to ordinary income tax and, if under age 59½, the 10% early withdrawal penalty.
What the Numbers Look Like Side by Side
The comparison below uses a 55-year-old in the 22% federal tax bracket who needs $50,000 and is evaluating three options over a 20-year horizon to age 75.
| Option | Approximate 20-Year Balance Impact | Key Risk |
|---|---|---|
| Keep $50,000 invested at 7% | $193,000 in the account | None (baseline) |
| 401(k) loan, repaid in 5 years | Roughly $138,000 (15 years of growth after repayment, plus double-tax drag on repaid dollars) | Job loss converts the loan to a taxable distribution |
| HELOC at the current average rate | $193,000 in the account (investments untouched) | Interest cost at roughly 7%; interest is not tax-deductible for most uses |
The gap between keeping the money invested and taking the 401(k) loan is approximately $55,000 at the 20-year mark. A HELOC at the national average of about 7% incurs real interest costs, but the 401(k) balance remains intact and continues to compound.
Why the Rate Comparison Understates the True Cost
With the prime rate at 6.75%, a typical 401(k) loan costs prime plus 1%, or roughly 7.75%. The interest you pay back into your own account replaces only a portion of the growth the money would have earned if it had stayed invested. A HELOC currently runs at about 7%, which is comparable in rate but leaves your entire retirement account untouched and compounding.
The 401(k) loan, therefore, creates a real opportunity cost that the loan interest only partially offsets, while also exposing you to the risk that the full balance could become immediately due if you lose or leave your job.
The Medicare Surcharge Connection
For borrowers who are already retired or close to it, a forced distribution from a defaulted 401(k) loan can trigger consequences beyond ordinary income tax and the 10% penalty. The 2026 IRMAA thresholds start at $109,000 MAGI for single filers. A $50,000 taxable distribution added to $80,000 in other retirement income crosses that threshold and triggers a Tier 1 IRMAA surcharge of $1,148 per person annually. Because IRMAA uses a two-year lookback period, the surcharge persists for the following two years. A single bad year of income from a loan default can cost $2,000 to $3,000 in Medicare premiums over the next two years, on top of the income tax and penalty.
Three Things to Check Before Borrowing
- First, honestly assess your risk of job loss. If you suddenly lost your job, would you be able to repay the outstanding 401(k) loan balance quickly using savings outside the plan? If the answer is no, the risk of a forced taxable distribution and possibly a 10 percent penalty should be a major factor in your decision. With the unemployment rate currently at 4.3 percent, this is not just theoretical.
- Next, compare the actual borrowing cost. The national average HELOC rate right now is about 7 percent. Since most 401(k) loans charge around 7.75 percent, the rate difference is often small. In that case, a HELOC is usually the smarter choice over the long run because your retirement savings stay fully invested and continue compounding.
- Finally, consider the Medicare impact. A large taxable distribution from a defaulted loan could push your MAGI above the first IRMAA threshold of 109,000 for singles or 218,000 for joint filers. That single event would trigger an additional $1,148 per person per year in Medicare premiums for two full years, on top of income tax and any early withdrawal penalty.
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