Should You Take a 401(k) Loan for Home Improvement?

Using a 401(k) loan for home improvement may feel like an easy solution to unexpected expenses. After all, you’re borrowing from yourself. There’s no credit check, and the interest you pay goes back into your retirement account. While the convenience may be appealing, the long-term financial trade-offs deserve your consideration. A 401(k) loan can impact your future retirement income, especially if the money would have otherwise compounded over time.

A financial advisor can help you evaluate your retirement outlook and determine whether a 401(k) loan aligns with your long-term financial goals.

When you take out a 401(k) loan, you’re borrowing money from your own retirement account rather than from a lender. Here’s what that typically looks like:

• You can borrow $10,000 or less, or, up to 50% of your vested account balance for a maximum of $50,000.
• Repayment is usually required within five years. Longer terms may be available to you if the loan is used to purchase a primary residence.
• You pay interest on the loan, but that interest goes back into your 401(k).
• Repayments are made through payroll deductions.

For many homeowners, home improvements aren’t just about aesthetics, they’re about maintaining or increasing their property value. A 401(k) loan for home improvement may offer a low-cost and accessible solution, especially if other options aren’t available.

The following are some of the reasons why homeowners opt to use a 401(k) loan for home improvements:

• No credit check: Approval is automatic since you’re borrowing from yourself.
• Lower interest rates: Often lower than credit cards or personal loans.
• Quick access to funds: Many providers disburse loans within a week.
• Paying interest to yourself: Unlike traditional loans, your interest payments go back into your retirement account.
• Helps avoid high-interest debt: For large renovation costs, this may be more affordable than high-APR alternatives.

While a 401(k) loan for home improvement may feel like a safe bet, it comes with notable risks. Even if the loan is repaid, the account misses out on potential market gains and compounding growth. The longer it takes to repay the loan, the greater those losses will be.

As an example, let’s say you borrow $30,000 from your 401(k) to renovate your kitchen. And for the sake of simplicity, let’s suppose that you pay it back five years later. In those five years, assuming a rate of return of 4%, it would’ve grown to $36,500 instead. Over 30 years, that $6,500 gain could grow to more than $20,000. 

But there are other risks to be aware of, too, such as: 

• Double taxation on interest: You repay the loan with after-tax dollars, then pay taxes again when you withdraw in retirement.
• Job separation risk: If you leave your job or are laid off, the remaining balance is due by the tax filing deadline of the following year (thanks to Secure 2.0).
• Loan default penalties: If not repaid, the loan becomes a distribution. This triggers income taxes and a 10% penalty if you’re under age 59½.
• Reduced retirement security: Even a repaid loan can slow the growth of your retirement portfolio.

In some cases, a 401(k) loan for home improvement could be a reasonable choice, especially when no better options are available. The following are some situations in which you might consider a 401(k) loan for a home improvement project: 

• You’ve explored other financing sources like home equity loans (HELOCs) or grants and been denied.
• The improvement prevents further damage (like a roof or plumbing repair).
• You have strong job security and a repayment plan.
• Your 401(k) balance is high, and you’re only borrowing a small portion.

It’s also worth considering whether the home project will increase your home’s value or energy efficiency, providing a potential return on investment.

Before pulling money from your 401(k) to fund home improvements, it’s important to look at other financing options that won’t cut into your retirement savings. A HELOC lets you borrow against the value of your home. These are often cheaper than unsecured debt, with a home equity loan offering predictable fixed payments and a HELOC providing flexible access to funds.

If your credit is strong, a personal loan can also work. It comes with fixed repayment terms and quick approval, and unlike a HELOC, it doesn’t put your house or retirement plan on the line.

A cash-out refinance is another option. By replacing your existing mortgage with a larger one, you get cash for renovations. The trade-off is that you’re extending the debt over a longer period, which could increase the total interest paid.

For energy-efficient projects, federal, state, and local programs may provide rebates, grants, or subsidized loans. These can directly lower the upfront cost and reduce utility bills going forward.

Looking at these alternatives first can help you fund renovations while keeping your retirement savings growing for the future.

Using a 401(k) loan for home improvement might be convenient, but it comes at a cost. Even if you repay the loan, the time your funds spend out of the market can impact your long-term retirement growth. That said, in the right circumstances, it can be a reasonable strategy. Just make sure you’ve explored all other options and understand the long-term implications.

• A financial advisor can help you evaluate the trade-offs and create a plan that balances current expenses with long-term retirement security. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• If you want to know how much your investments could grow over time, SmartAsset’s investment calculator can help you get an estimate.

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