Taking a loan from your 401(k) is one of the worst financial moves you can make, according to personal finance expert Suze Orman. Her position has never wavered. A 2026 episode of her Women and Money podcast made that crystal clear: when a 50-year-old caller with $33,000 in divorce debt asked about raiding her $87,000 account, Orman cut her off cold. The advice is simple. The math behind it is even more persuasive.
The Double-Taxation Trap
With a traditional 401(k), every dollar you contribute goes in before taxes. When you borrow against that account, you repay the loan with after-tax dollars, typically at an interest rate of 8% to 9% tied to the prime rate. The problem is that those repaid dollars sit inside a pre-tax account, so you will pay income taxes on them again when you withdraw the money in retirement. You effectively get taxed twice on the same money and pay interest on top of it.
The job-loss scenario makes the trap even more dangerous. If you lose your job while a loan is outstanding, the entire remaining balance typically becomes due. Fail to repay it and the IRS treats the balance as a distribution, taxing it as ordinary income and adding a 10% early-withdrawal penalty for anyone under age 59 1/2.
The data confirm how common this problem has become. Vanguard’s 2025 report found that 13% of participants carried a 401(k) loan during 2024, with an average outstanding balance of about $10,700. Hardship withdrawals tell an even more concerning story: 4.8% of participants took one in 2024, up from roughly 2% before the pandemic. By 2025, that rate climbed further to 6%, a record high, according to a preview of Vanguard’s 2026 annual report. A separate survey by Alight found that 59% of workers who have taken a 401(k) loan say it had a negative impact on their retirement savings.
What Other Experts Say About It
“Before you consider taking a loan or a withdrawal from your 401(k), which may be your only retirement savings, make sure you’ve explored other options that could meet your needs,” says Kai Walker, managing director of Retirement Research and Inclusion Transformation at Bank of America, as quoted by Merrill Lynch. If cash is genuinely needed, a home equity loan or a personal loan are preferable paths, but even those deserve a conversation with a financial advisor before any decision is made.
The opportunity cost of a 401(k) loan is a point financial planners stress consistently. “It is common to assume that a 401(k) loan is effectively cost-free since the interest is paid back into the participant’s own 401(k) account,” says James B. Twining, CFP, CEO and founder of Financial Plan Inc., as quoted by Investopedia. Twining explains the flaw in that logic: “there is an ‘opportunity’ cost, equal to the lost growth on the borrowed funds. If a 401(k) account has a total return of 8% for a year in which funds have been borrowed, the cost on that loan is effectively 8%. [That’s] an expensive loan.”
Securian makes the compounding impact concrete: “When you reduce the balance of your 401(k) account, you have less money growing along with potential gains in the market. In addition, some 401(k) plans have terms that prevent you from being able to make further contributions until the loan is repaid. So not only are you missing out on potential gains on the amount you withdrew, you may also be slowing down the growth of your principal for the duration of your loan.”
The 2026 Podcast Moment That Said It All
Orman’s resolve was on full display in a 2026 episode of Women and Money. A 50-year-old caller named Andrea had $33,000 in revolving debt from divorce legal fees, an $87,000 401(k), and two existing loans already outstanding against that account. She wanted to do a hardship withdrawal to clear the high-interest balances. Orman’s response left no room for negotiation: “Do not, and I repeat, do not do a hardship withdrawal. Do not do another loan. Don’t do it.” She pointed Andrea to NFCC.org, the National Foundation for Credit Counseling, which operates a nationwide network of certified counselors who can negotiate lower rates with creditors directly.
The underlying principle Orman returned to is one she has repeated throughout her career: money inside a 401(k) is protected from creditors, even in bankruptcy. The moment funds leave the account, that protection is gone. Unsecured debt, by contrast, has its own off-ramps, including negotiation, balance-transfer cards, debt consolidation, and, in a worst case, bankruptcy itself. Spending protected retirement dollars to pay off debt that can be restructured is a trade that almost never makes mathematical sense.
Focus on Contributing, Not Borrowing
The IRS raised the 401(k) employee contribution limit to $24,500 for 2026, up from $23,500 in 2025. Workers aged 50 and older can add a catch-up contribution of $8,000 on top of that, bringing their ceiling to $32,500. Those aged 60 to 63 qualify for an even higher super catch-up of $11,250, pushing their total to $35,750. One new wrinkle for high earners: starting in 2026, anyone who earned more than $150,000 in W-2 wages during 2025 must make all catch-up contributions on a Roth basis. These are the contribution levers worth understanding, not the loan provisions buried in plan documents.
The consensus from Orman and the broader community of financial planners is consistent: leave your retirement account alone. The 401(k) is built to compound over decades, and every dollar borrowed is a dollar that stops growing. If a financial emergency genuinely demands action, exhaust every other option first, and consult a certified financial planner before touching a single dollar of retirement savings.
Editor’s note: This pass corrected the average 401(k) loan balance from approximately $11,000 to approximately $10,700 based on Vanguard’s 2025 report data, updated the hardship withdrawal figures to include Vanguard’s 2025 rate of 6% (a new record, up from 4.8% in 2024 and roughly 2% before the pandemic), revised the typical loan interest rate range from 7%-9% to 8%-9% to reflect current prime-based benchmarks, and added the 2026 SECURE 2.0 Roth catch-up requirement for high earners.
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