HELOC vs 401k loan math turns on one number most comparisons skip: the return the borrowed 401(k) dollars would have earned while they were out of the market.
In a HELOC vs 401k loan comparison, a HELOC charges interest paid to a lender, deductible only when the money buys, builds or substantially improves the home and the borrower itemizes. A 401(k) loan charges interest paid back into the borrower’s own account, so its real cost is the missed market return plus tax on that interest.
By Craig Wear, CFP® | Last reviewed: October 28, 2026
Key Takeaways
- A 401(k) loan is capped at the lesser of $50,000 or the greater of half the vested balance or $10,000, and must be repaid within 5 years with level payments at least quarterly (IRC 72(p)(2)).
- The bank prime rate has been 7.00% since September 17, 2026 (Federal Reserve H.15). Many plans price loans at prime plus 1, and DOL rules require a rate “commensurate” with commercial lenders (29 CFR 2550.408b-1(e)).
- HELOC interest is deductible only on debt used to buy, build or substantially improve the home securing it; the One Big Beautiful Bill Act (sec. 70108) made that limit permanent in IRC 163(h)(3)(F).
- 401(k) loan interest is never deductible when the loan is secured by elective deferrals, even if the money buys a house (IRC 72(p)(3)).
- Q3 calculation, $50,000 over 5 years: a 7.50% HELOC costs $10,114 in interest; an 8.00% 401(k) loan costs $2,382 after tax at a 0% market return, $6,978 at 5% and $10,450 at 8%.
- After a job loss, the unpaid 401(k) loan becomes an offset that can be rolled over until the tax filing deadline, including extensions (IRC 402(c)(3)(C)); if it is not, a hypothetical 45-year-old couple owes $7,118 on a $32,353 offset versus $3,882 at age 56.
- A HELOC lender may freeze or cut the line if the home’s value “declines significantly” or the borrower’s finances change materially (12 CFR 1026.40(f)(3)(vi)).
HELOC vs 401(k) Loan: Four Numbers for 2026
Q3 calculation using 2026 IRS figures (Rev. Proc. 2025-32); hypothetical household borrowing $50,000 for 60 months. Rates are illustrations, not quotes or promised outcomes.
HELOC vs 401k loan: which costs less in 2026?
Neither is cheaper in every case; the answer depends on what the 401(k) money would have earned and whether the HELOC interest is deductible. A HELOC’s cost is fixed at whatever interest the lender collects. A 401(k) loan’s cost moves with the market, because the borrowed dollars sit in a loan receivable instead of investments.
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The table below models one hypothetical borrower: $50,000, 60 level monthly payments, a HELOC at prime plus 0.50 (7.50%) and a plan loan at prime plus 1 (8.00%). The HELOC rate is held flat for illustration even though most HELOCs float with prime.
| Scenario ($50,000, 5 years) | Monthly payment | Interest paid | Net after-tax cost to household |
|---|---|---|---|
| HELOC 7.50%, interest not deductible (or standard deduction taken) | $1,002 | $10,114 to lender | $10,114 |
| HELOC 7.50%, home improvement, itemizer in 22% bracket | $1,002 | $10,114 to lender | $7,889 |
| HELOC 8.50% (prime plus 1.50), not deductible | $1,026 | $11,550 to lender | $11,550 |
| 401(k) loan 8.00%, investments would have returned 0% | $1,014 | $10,829 to own account | $2,382 |
| 401(k) loan 8.00%, investments would have returned 5% | $1,014 | $10,829 to own account | $6,978 |
| 401(k) loan 8.00%, investments would have returned 8% | $1,014 | $10,829 to own account | $10,450 |
| 401(k) loan 8.00%, investments would have returned 10% | $1,014 | $10,829 to own account | $13,096 |
Q3 calculation using 2026 IRS figures; hypothetical household. 401(k) cost = payments minus the $50,000 borrowed, minus the after-tax change in the account’s value versus leaving $50,000 invested, assuming a 22% tax rate when the pre-tax money is eventually withdrawn. Nominal, undiscounted, federal only. Script: calc_heloc-vs-401k-loan.py.
The crossover sits near a 7.7% annual return. Below it, the 401(k) loan modeled here leaves the household better off than a nondeductible 7.50% HELOC; above it, the HELOC does. If the HELOC interest is deductible at 22%, the crossover drops to about 5.8%, because the tax break shaves $2,225 off the HELOC’s cost.
Monthly payments are nearly identical, so cash flow rarely decides the question. What decides it is market behavior over the next five years, which no one knows in advance, and the two risks covered below: losing the job and losing the house. For households weighing a full withdrawal instead, see how long a 401(k) cash-out takes.
Why is interest paid to yourself not free?
Interest paid to yourself replaces, rather than adds to, the return the money would otherwise earn. At an 8.00% loan rate and a 0% market, the account actually ends $10,829 ahead; at a 10% market, it ends $2,906 behind where it would have been, before taxes.
The popular claim that 401(k) loans are “double taxed” is only partly true. The $50,000 left the plan untaxed, and repaying it with after-tax pay is no different from repaying any loan with after-tax pay. Only the interest, $10,829 here, goes in after tax and comes out taxed again, which at a 22% rate costs $2,382: exactly the 0% return row above.
Two side costs do not show up in the table. Some borrowers cut their deferrals to afford the payment and forfeit an employer match, and plans may charge a loan setup fee. Both push the 401(k) column higher.
When is HELOC interest tax deductible in 2026?
HELOC interest is deductible in 2026 only if the borrowed money is used to buy, build or substantially improve the home that secures the line, and only for taxpayers who itemize. IRC 163(h)(3)(F) switches off the old deduction for “home equity indebtedness,” and OBBBA sec. 70108 removed the 2025 sunset, so the rule now applies indefinitely.
The statute defines acquisition debt as debt “incurred in acquiring, constructing, or substantially improving any qualified residence” and “secured by such residence,” with total acquisition debt capped at $750,000 ($375,000 married filing separately) (IRC 163(h)(3)(B) and (F)). A HELOC that pays off credit cards or a car produces no deduction, however the lender labels it.
Itemizing is the second gate. A married couple’s 2026 standard deduction is $32,200, so the HELOC interest helps only to the extent mortgage interest, capped state and local taxes and charitable gifts together exceed that figure. The standard deduction vs itemizing guide for retirees walks through that breakeven.
A 401(k) loan cannot qualify at all. It is secured by the account, not the home, and IRC 72(p)(3) separately denies any interest deduction on a plan loan secured by elective deferrals or made to a key employee. That subsection is the reason a 401(k)-funded kitchen remodel never generates a write-off.
How much can you borrow, and for how long?
A 401(k) loan tops out at $50,000 and 5 years; a HELOC’s size and term are set by the lender and the home’s equity. The table summarizes the rules that apply in 2026. A loan differs from a distribution, and the treatment of each is covered in how 401(k) distributions are treated as income.
| Rule | 401(k) loan | HELOC |
|---|---|---|
| Maximum amount | Lesser of $50,000 (reduced by the highest balance in the prior 12 months) or the greater of 50% of vested balance or $10,000 | Lender’s combined loan-to-value limit on the home |
| Term | 5 years; longer allowed for a loan used to buy a principal residence (72(p)(2)(B)(ii)) | Draw period, then repayment period, per contract |
| Rate | Set by plan document; must be “reasonable” under 29 CFR 2550.408b-1(e) | Usually prime plus a margin, variable |
| Credit check | None required by law | Underwriting, appraisal, income documentation |
| Missed payment | Cure period ends no later than the last day of the following calendar quarter, then the full balance is a taxable deemed distribution | Late fees, credit reporting, and ultimately foreclosure risk |
| Interest deductible? | No (72(p)(3)) | Only for buy, build or substantially improve, and only if itemizing |
Sources: IRC 72(p); Treas. Reg. 1.72(p)-1, Q&A-10; IRC 163(h)(3); 29 CFR 2550.408b-1. HELOC terms vary by lender.
The DOL’s own example in 29 CFR 2550.408b-1(e) shows why plans rarely undercut banks: a fixed 8% plan loan failed the reasonable-rate test because local banks would have charged 10% variable or 12% fixed. Plan loan rates therefore tend to track, not beat, commercial rates.
The mechanics of requesting, repaying and prepaying a plan loan are covered in can you pay off a 401(k) loan early, and who sees the loan is covered in will my employer know if I take a 401(k) loan.
What happens to each loan if you lose your job?
A job loss can turn a 401(k) loan into taxable income, while a HELOC keeps its payment schedule but may lose its unused credit. That asymmetry is the largest practical difference between the two.
When employment ends, most plans accelerate the loan and reduce the account by the unpaid balance, a “plan loan offset.” Since 2018, IRC 402(c)(3)(C) gives the borrower until the due date, including extensions, of the tax return for the year of the offset to deposit that amount into an IRA or another plan and avoid tax. A 2026 offset can therefore be rolled over as late as October 15, 2027 if the return is extended. The broader loan versus withdrawal trade-off is covered in 401(k) loan vs withdrawal.
| Job loss after 24 payments, $32,353 unpaid (hypothetical, MFJ) | $90,000 wages | $150,000 wages |
|---|---|---|
| Offset rolled over by the extended filing deadline | $0 | $0 |
| Not rolled over, age 56, separated in or after the year turning 55 | $3,882 (12.0% of offset) | $7,118 (22.0%) |
| Not rolled over, age 45: income tax plus 10% additional tax | $7,118 (22.0%) | $10,353 (32.0%) |
| Same borrower with a HELOC instead | $32,209 still owed to the lender; no tax, payments continue | |
Q3 calculation using 2026 IRS figures (Rev. Proc. 2025-32 married filing jointly brackets, $32,200 standard deduction); hypothetical household; federal only, no state tax. Offset = balance of an 8.00%, 60-month $50,000 loan after 24 payments.
The age 56 row reflects the separation-from-service exception in IRC 72(t)(2)(A)(v), explained in the rule of 55 guide. At 45 no exception applies, so the 10% early withdrawal penalty adds $3,235. For the $90,000 household, that one event costs nearly as much as the full five years of HELOC interest after a deduction.
The HELOC side carries its own job-loss risk. Under 12 CFR 1026.40(f)(3)(vi)(B), a lender may block new draws or cut the limit if it “reasonably believes” the borrower cannot repay because of a material change in financial circumstances. A line opened as an emergency reserve can close exactly when it is needed.
Can retirees use either option?
Retirees usually cannot take a new 401(k) loan, but they can apply for a HELOC if their retirement income supports the payment. The IRS notes that a plan “may, but is not required to” offer loans (IRS retirement plan loan FAQs), and most plan documents limit new loans to active employees paid through payroll.
For the HELOC, Regulation B works in a retiree’s favor. Under 12 CFR 1002.6(b)(5), a creditor “shall not discount or exclude” income because it is “an annuity, pension, or other retirement benefit,” although it may weigh the amount and probable continuance of that income. Lenders still document Social Security, pension and required distributions.
Home-secured debt is common at these ages: a Q3 tabulation of the Fed’s 2025 survey found 43.1% of homeowners aged 65 to 79 still carried a mortgage or home equity line, detailed in how much debt retirees have. For retirees weighing a traditional IRA withdrawal against a HELOC instead, using a 401(k) to pay off debt compares the gross-up math.
How does the choice interact with a Roth conversion plan?
A HELOC adds no taxable income, while an unrolled 401(k) loan offset adds the full balance to that year’s income. That matters because conversion room is measured in bracket space.
Take the $150,000 couple from the job-loss table: taxable income of $117,800 before the offset leaves $93,600 of room below the $211,400 top of the 22% bracket in the 2026 federal tax brackets. An unrolled $32,353 offset uses about a third of that room, room that could otherwise absorb a Roth conversion taxed at 22% rather than a higher future rate.
The reverse case is also common. A layoff year with low wages can be a natural conversion window, as discussed in Roth conversion in a low-income year, and rolling the offset over by the deadline keeps that window open. A financial professional can model whether the offset, a conversion, or both fit in the same tax year.
Which risk weighs more: your house or your retirement account?
A HELOC puts the home at risk if payments stop; a 401(k) loan puts tax-deferred savings and their future growth at risk if employment stops. Households often compare those risks in this order.
- Job stability over the next five years. A likely job change before the loan is repaid makes the offset rules in IRC 402(c)(3)(C) the central question.
- Use of the money. A home improvement can make HELOC interest deductible under IRC 163(h)(3); almost any other use cannot.
- Itemizing status. Below a $32,200 married standard deduction, the deduction is worth nothing.
- Rate outlook. HELOC payments rise when prime rises; a plan loan rate is often fixed at origination under the plan document.
- Portfolio mix. Money drawn from a conservative allocation forgoes less return than money drawn from stocks, which lowers the 401(k) loan’s modeled cost.
None of these factors is decisive alone, and the table figures are hypothetical illustrations rather than expected results.
Frequently asked questions
Is it better to get a HELOC or borrow from a 401k?
It depends on job security, how the money is used and what the 401(k) investments would earn. In Q3’s hypothetical $50,000 example, an 8% 401(k) loan cost less than a nondeductible 7.5% HELOC whenever annual returns stayed under about 7.7%, but a job loss without a rollover added thousands in tax and penalty.
How much would a $100,000 HELOC cost per month?
At a hypothetical 7.50% rate (prime of 7.00% plus 0.50), interest-only payments on a fully drawn $100,000 line are $625 a month. Amortized over 20 years the payment is about $806, and over 10 years about $1,187. Because most HELOCs are variable, the payment changes when prime changes.
What does Dave Ramsey say about HELOCs?
Dave Ramsey is widely reported to discourage HELOCs and home equity loans, mainly because the house becomes collateral for consumer spending. Federal rules add a related point: under 12 CFR 1026.40, a lender can freeze or reduce a line if the home’s value drops significantly or the borrower’s finances change materially.
How is a $50,000 home equity loan different from a $50,000 HELOC?
A home equity loan pays the full $50,000 at closing, usually at a fixed rate with level payments. A HELOC is a revolving line: the borrower draws as needed during the draw period, pays interest only on what is drawn, and the rate usually floats with prime. The tax deduction rules under IRC 163(h)(3) are the same for both.
Is 401(k) loan interest tax deductible?
No. A 401(k) loan is secured by the account rather than the home, so it is not qualified residence interest, and IRC 72(p)(3) bars any deduction for interest on a plan loan secured by elective deferrals or made to a key employee.
Is a 401(k) loan taxed twice?
Only the interest is. The borrowed principal was never taxed when it left the plan, so repaying it with after-tax pay is not a second tax. The interest goes in after tax and is taxed again at withdrawal; on $10,829 of interest at a 22% rate, that is $2,382.
Can I use a 401(k) loan for a down payment?
Yes, if the plan offers loans. IRC 72(p)(2)(B)(ii) lets a loan used to acquire a principal residence run longer than 5 years, though the $50,000 and 50% of vested balance limits still apply and the interest is still not deductible.
Can I take a 401(k) loan after I retire?
Usually not. Plans are not required to offer loans at all, and most limit new loans to active employees who repay through payroll. Retirees who need to borrow against assets more often look at a HELOC, where Regulation B bars lenders from discounting pension or other retirement income.
Methodology: Figures labeled “Q3 calculation” come from a Python script (calc_heloc-vs-401k-loan.py) that amortizes a hypothetical $50,000, 60-month loan with level monthly payments. The prime rate (7.00%) is the Federal Reserve H.15 bank prime loan rate in effect since September 17, 2026; the 8.00% plan loan rate (prime plus 1) and 7.50% and 8.50% HELOC rates are illustrative assumptions, held constant. The 401(k) cost compares the account’s value after 60 months with and without the loan, each repayment reinvested at the stated annual return, and converts the difference to after-tax dollars at an assumed 22% future withdrawal rate; results are nominal and undiscounted. Job-loss figures apply 2026 married filing jointly brackets and the $32,200 standard deduction from Rev. Proc. 2025-32 to the incremental income, federal only. Legal rules are taken from the statute and regulation text (IRC 72(p), 72(t), 163(h), 402(c); Treas. Reg. 1.72(p)-1; 29 CFR 2550.408b-1; 12 CFR 1002.6 and 1026.40). Because this is a financial topic, anonymous forum anecdotes and unsourced secondary statistics were excluded.
This article is for educational purposes only and is not individualized investment, tax, or legal advice. Consult a qualified professional about your specific situation.
