Today I’m sharing a guest post from reader Ashley Patrick. She asked to tell her story to my audience, and I immediately said yes. This is her personal account of how a 401(k) loan ended up costing her far more than she expected — and why you should think twice before borrowing from your retirement account.
You’ve been thinking about taking a 401(k) loan.
Everyone says it’s a great option because you’re “paying yourself back.”
It sounds like a low-risk loan with an attractive interest rate for an unsecured loan.
But there’s a saying: if it sounds too good to be true, it probably is.
So you’re wondering, what’s the catch?
You borrow without doing a formal withdrawal and you repay yourself. You’re paying yourself at a low rate, so what’s the harm?
Here’s how our 401(k) loan ended up costing us the equivalent of $1,000,000 by retirement.
There are many reasons not to take a 401(k) loan — and we experienced them all.
How My 401(k) Loan Cost Me $1,000,000
Let me start at the beginning…
My husband and I bought our dream house when we were just 28 and 29 years old. It was our second home and, to be honest, larger than we probably should have taken on. But it had a massive 40×60 shop, and we loved the property. We bought a $450,000 house with an 18-month-old child.
The house sat on 10 wooded acres and had floor-to-ceiling windows throughout. Our payment was about $2,200 per month. We had an 18-month-old in daycare and both of us were working full time. Two months after buying the house, I discovered I was pregnant again. We had been trying, so the news wasn’t a surprise—but the house layout was.
The home was essentially a small two-bedroom with an in-law suite that didn’t connect to the main living space. We needed an extra bedroom and play area, and the logical fix was to enclose part of the covered patio and connect the spaces. The renovation would cost about $25,000. We didn’t have $25,000 in savings, and our mortgage was already maxed out.
Several people who considered themselves “financially savvy” suggested a 401(k) loan. Their pitch: you’re paying yourself back, so it’s not really borrowing. It’s your money; you’re just using it temporarily.
Our first issue with the loan
It seemed like the perfect solution, so we took out a $25,000 401(k) loan in the summer of 2013. When I checked the account shortly afterward, I noticed the funds had been removed from the 401(k). I assumed this was a mistake.
Turns out, it wasn’t a mistake: they actually take the money out of your 401(k). It stops earning compound returns while it’s gone. I had assumed the plan merely used the account as collateral; I didn’t realize the balance would be reduced.
We pressed on because we had no better option. The construction was completed just in time for our second child’s arrival, and the new layout worked much better for our family. Loan payments were being deducted automatically from my husband’s paycheck.
Then issue #2 with 401(k) loans
The second problem arrived in January 2014: my husband was laid off. Suddenly we had a newborn and a two-year-old in an expensive house and the main earner had lost his job of seven years. I assessed our savings and severance and calculated we could manage for several months, but then we received a letter: pay the outstanding 401(k) loan balance within 60 days.
At that point the balance was over $20,000. We had made payments for less than a year on a five-year loan. My husband didn’t yet have new employment, and we didn’t have enough in savings to cover the balance without risking our ability to pay for basic needs. We ignored the notice because we couldn’t get another loan to refinance it.
Fortunately, my husband found another job fairly quickly. We were relieved and didn’t think much more about the loan.
Then came issue #3
In January 2015, the third problem surfaced. We received tax forms from the plan administrator. Because we hadn’t repaid the loan within the required 60 days when he lost his job, the outstanding balance was treated as a distribution and taxed as ordinary income.
When I did our taxes, we went from expecting a refund to owing roughly $6,500. Between additional taxes and the effect on our tax bracket, the loan ended up costing around $10,000 in taxes alone. I put that bill on a 0% introductory APR credit card for 18 months and learned a hard lesson: I vowed never to take another 401(k) loan.
The silver lining
In hindsight, my husband losing his job turned into a blessing. He’s much happier at his new role, and the experience inspired me to pursue financial coaching. Facing the credit card bills for the taxes forced us to get serious about paying them off. That’s how I found Dave Ramsey’s approach; using those principles, we paid off the credit card and ultimately eliminated about $45,000 of consumer debt (excluding the mortgage) in 17 months.
The true cost of 401(k) loans
Recently I ran the numbers on what that 401(k) loan really cost us. We withdrew $25,000 and paid roughly $10,000 in taxes and related costs — that’s already $35,000 lost from the initial amount. But the bigger loss is opportunity cost: the compound interest we missed out on while those funds were absent from our retirement account.
Using a common assumption that investments can double every seven years at a 10% average annual return, the $25,000 would have grown dramatically over several decades. Because we were only 28 and 29 when we took the loan, that $25,000 could have grown to approximately $1 million by retirement age. Even if you can later make extra contributions to catch up, you’ve already missed the power of time and compounding.
Why “it won’t happen to me” is a risky belief
Life changes. I’m no longer working full time and we added another child. Thinking you’ll always repay the loan on schedule is risky — unexpected events often take priority. Even if you manage to repay the loan, you still forgo the compound growth your balance would have earned while the money was out of the market. Most 401(k) loans have a five-year term, which is long enough for missed compounding to be significant.
You must factor in lost compound returns, not just the interest rate you pay on the loan. Often the rate you’re “paying yourself” is far lower than the return you’d otherwise earn, so you’re still losing money in the long run.
Lessons Learned from my 401(k) loan
Key takeaways from our experience:
- Don’t miss out on compound interest — time in the market matters.
- A 401(k) loan functions like a withdrawal: the funds are removed from your account.
- If you leave or lose your job, the outstanding balance is typically due within 60–90 days.
- If you fail to repay within that timeframe, the outstanding balance is treated as taxable income.
If you’re considering a 401(k) loan, explore other ways to pay for what you need. Cash savings are the safest option. If you can’t pay cash, save until you can limit how much debt you take on. Distinguish between wants and needs: if it’s a want, wait. A 401(k) loan should be an absolute last resort.
Also remember that a 401(k) loan can tie you to a job for the loan’s duration, limiting opportunities and increasing financial risk if your employment situation changes.
I hope you’ll learn from our mistakes and make an informed decision. Don’t make an ill-informed choice like we did.
Ashley Patrick is a Ramsey Solutions Financial Master Coach and the owner of Budgets Made Easy. She helps people create budgets and save money so they can eliminate debt.
What do you think about 401(k) loans? Have you ever taken one out?