If you have a qualified retirement plan through your company—or you’ve set one up as a self-employed individual, such as a 401(k), profit-sharing, or Keogh plan—you might be able to borrow from your account. This can be a useful financial tool when handled correctly. However, while borrowing from your retirement account offers short-term flexibility, it comes with rules and risks that can have long-term tax consequences if overlooked.
This is where partnering with a CPA firm near me, like Burton McCumber & Longoria, can help. Understanding how and when to take advantage of a retirement plan loan can protect your savings and minimize your tax liability. Let’s walk through the essentials in plain terms.
Why Borrow From Your Retirement Account?
When you take out a plan loan, you’re essentially borrowing from yourself. The money you borrow is repaid—with interest—back into your account, meaning you’re paying yourself instead of a bank or credit card company. This can make sense if you need quick access to funds for major expenses, such as home repairs, education costs, or emergencies, without triggering taxes on a withdrawal.
However, there’s a critical catch: you must repay the loan on time. Failing to do so can lead to serious tax consequences, including early withdrawal penalties. A CPA firm near me can help you weigh the pros and cons before you decide to borrow and ensure the terms align with your overall financial strategy.
How Much Can You Borrow?
The IRS limits how much you can borrow from your retirement plan. Generally, the maximum loan amount is the lesser of:
- $50,000, or
- 50% of your vested account balance.
Most loans are secured by your vested account balance, meaning the funds you’ve earned and own outright. Your employer’s plan may have additional restrictions, so reviewing the details before making a move is essential.
A CPA firm near me can review your plan’s terms, calculate your eligible borrowing amount, and help you understand the repayment requirements to avoid unintentional tax issues.
The Drawbacks of a Retirement Plan Loan
While it may sound convenient, borrowing from your retirement plan has two significant drawbacks to consider.
Drawback #1: You could permanently reduce your retirement savings.
Even if you repay the loan, the time your money spends out of the market could result in lost growth opportunities. Plus, annual contribution limits may prevent you from making up the difference later.
Drawback #2: Defaulting has tax consequences.
If you don’t repay the loan according to its terms, the IRS will treat the unpaid balance as a taxable distribution. That means you’ll owe federal (and possibly state) income tax on the balance. If you’re under 59½, you’ll also face a 10% early withdrawal penalty.
In short, not repaying your loan is an expensive mistake. Working with a CPA firm near me before taking a retirement plan loan can help you understand the implications and build a realistic repayment strategy.
Can You Deduct the Interest?
This is where things get complicated. Whether the interest you pay on your plan loan is deductible depends on how you use the borrowed money. Here’s a simplified breakdown of how it works:
- Personal expenses: Interest on personal expenses is generally not deductible unless it’s tied to buying or improving your main or second home. Even then, certain retirement plan loans don’t qualify.
- Business expenses: If you use the funds in an active trade or business—such as investing in your small business—the interest may be deductible as a business expense.
- Investment expenses: If you use the loan for investment purposes, the interest may be deductible to the extent of your investment income (like interest or short-term capital gains).
These distinctions can be tricky. A CPA firm near me can help trace the funds and categorize the interest correctly to ensure you’re not missing a legitimate deduction or claiming one you can’t support.
Exceptions to the General Rules
Unfortunately, the IRS limits deductions on certain types of plan loans. For example, you typically cannot deduct interest on loans from 401(k) or 403(b) plans if any part of your account balance comes from elective deferrals (money contributed through payroll deductions).
Even if you use the loan for qualified business or investment purposes, the deduction usually won’t apply if your loan is backed by elective deferrals. Since most 401(k) and 403(b) balances include these funds, the interest is rarely deductible.
However, there are exceptions. If your account was funded only with employer contributions and earnings, or your loan is secured exclusively by those funds (and possibly another asset like your home), you may qualify under the general interest deduction rules. This situation is rare but possible—another reason why it pays to consult a CPA firm near me before making any assumptions.
What About Other Types of Plans?
If your loan comes from a different type of qualified plan—such as a defined benefit pension plan or a profit-sharing plan—you have a better chance of deducting the interest, depending on how you use the funds.
Under the general IRS rules for individual taxpayers, your ability to deduct the interest depends on whether the borrowed money goes toward personal, investment, or business expenses.
However, there’s an important limitation: if you’re a key employee of the company sponsoring the plan, you cannot deduct any interest on the loan.
Who Qualifies as a Key Employee?
You’re considered a key employee if any of the following applies:
- You’re an officer earning more than $230,000 in 2025 (up from $220,000 in 2024).
- You own more than 5% of the company, including any ownership attributed through family or related-party rules.
- You own more than 1% of the company and earn over $230,000 in 2025 ($220,000 in 2024).
If you meet any of these criteria, the IRS restricts you from deducting interest on plan loans, regardless of how the borrowed money is used.
Putting It All Together
Borrowing from your retirement plan can serve as a financial lifeline during times of need, but it’s not without risks. The interest you pay might not be deductible, the loan could impact your long-term savings, and missed payments could trigger costly taxes and penalties.
That’s why it’s essential to approach a plan loan with the same care you’d take when borrowing from any other source. A CPA firm near me like Burton McCumber & Longoria can help you navigate every step—from determining if you qualify to understanding repayment terms, deductibility, and the potential impact on your future retirement balance.
The Bottom Line
Retirement plan loans can seem like an easy way to access your savings without tax penalties—but the rules behind them are anything but simple. Before taking action, it’s worth consulting a professional who can walk you through the fine print and ensure you’re not putting your financial future at risk.
When you partner with a CPA firm near me, you gain more than just tax preparation support—you gain a trusted advisor who helps you make informed financial decisions that align with your goals.
Contact Burton McCumber & Longoria today to discuss your retirement strategy, plan loan options, and tax-saving opportunities. Their experienced team can help you make smart, confident choices that protect both your present and your future.