If I Have a 401(k) Loan, Can I Get Another Loan Prior to Repayment?

Each 401(k) plan can make its own rules about participant loans, within certain limits. Many allow participants to take multiple loans, as the availability to dip into the funds if needed may encourage more people to use 401(k)s to save for retirement. However, both your individual plan and the Internal Revenue Service may restrict the amount you can borrow.

The IRS mandates that 401(k) participants can’t take out more than $50,000 or half of their vested balance, whichever is lesser, in loans from any given plan from an employer. Loans have to be paid back over a five-year period, unless you’re using the proceeds to buy a home or you’re called up for military service. Loans aren't hardship-based, but ultimately the IRS allows administrators a lot of leeway in how they handle them, as long as the borrowers don't exceed the IRS limits.

Your individual 401(k) plan makes the decision on handling loans. It can choose not to allow them at all or limit participants to one outstanding loan at a time. Some make you wait a fixed amount of time after one loan is paid off before you can take another one. Many plans do allow more than one loan at a time, so check with yours to see if it falls into that category.

If your plan does allow for multiple loans, figuring the maximum amount you can borrow isn’t as simple as subtracting your current loan balance from the maximum you’re allowed to borrow. Instead, your maximum loan amount is based on the highest outstanding balance you had on your loans in the previous 12 months. For example, say your plan allows loans up to the IRS maximum, and you have one loan outstanding for $20,000.

If the balance was $35,000 11 months prior, those $15,000 in payments won’t be considered for your loan application. You’ll be allowed to borrow only a maximum of $15,000, or $50,000 minus $35,000.

Some administrators require that you repay your loans via a payroll deduction. If yours doesn’t, you’ll have to make payments according to the administrator’s schedule, but the payments can’t be less frequent than quarterly. Miss those payments, and the amount borrowed can be treated as a distribution, which leads to a 10 percent penalty and additional income tax burdens if you’re younger than 59 1/2.

While a 401(k) loan means you're essentially borrowing from yourself, that does not mean the loan is harmless. On the plus side, it offers access to a pool of funds when you don't have any other borrowing options, for example, when you don't have the credit score to qualify for a personal loan. On the downside, taking a loan or multiple loans from a 401(k) has a significant opportunity cost. You'll miss out on the compound growth that your fund should be making, which means there'll be less cash available at retirement. Assuming you suspend or reduce your contributions for the duration of the loan, you'll miss out on the employer match too.