Borrowing from a 401(k) can help build wealth — but it’s risky.
How much risk are you willing to take to go from being comfortable to being rich?
That was the question facing Dr. Jill Green when she graduated from medical school with a ton of student debt and a family net worth of “negative $1 million.” She and her husband, who is also a doctor, had only their primary home as an asset. Paying off all that debt seemed like it would inevitably require grinding 80-hour work weeks for the rest of their lives.
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Her perspective changed when she went to a wealth-building seminar for medical professionals. The facilitators convinced her and her husband to reduce their tax burden and create passive income through real estate investing.
Today, Green owns several rental properties that are returning her income. The catalyst for her first deal was not a traditional savings account or a windfall, but a loan taken against her 401(k) to cover a down payment.
While her success is remarkable, her journey serves as a case study of high-stakes leverage rather than a universal blueprint for retirement planning. The same financial mechanism that allowed her to jump-start her portfolio could have derailed her long-term security — just like it could do to you.
The mechanics of using retirement loans for real estate
Green borrowed from her 401(k) to help fund the down payment on a medical office building, which served as her entry point into property investment.
This approach functions as a form of self-financing. Instead of seeking a third-party lender for the full amount or waiting years to save up enough cash, a borrower can access their retirement funds as a loan — with interest you pay to yourself.
You can repay the loan through automatic payroll deductions. Green did so over a five-year schedule with only $200 coming out per paycheck. Using this strategy, she was able to scale her portfolio by adding roughly one property per year.
The practical appeal of this method is obvious for professionals who have significant retirement balances, but little access to liquid cash. However, this path uses assets with two very different risk profiles.
Retirement accounts are designed for passive, long-term market growth, while real estate requires active management and the discipline to pay down debt.
What’s more, relying on a repeatable system of leverage depends heavily on external factors, including the presence of stable tenants, the availability of financing, and the assurance that your high-income job (in this case, medicine) is not interrupted, because it is the key to being able to repay the loans.
It’s also worth noting that this approach might make sense for doctors, whose labour is always in demand. According to the Bureau of Labor Statistics, physicians and surgeons make a median income of $239,200 per year (2). Some specialties make much more. But even if you’re highly paid, relying on this level of income to pay off loans tied to real estate may be too risky.
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Understanding the risks
While Green’s outcome is remarkable, borrowing from a retirement plan is relatively common.
Data from the EBRI/ICI 401(k) database shows that a meaningful minority of workers utilize these loans. In 2022, about 84% of plan participants were eligible for loans, and of those, 15% had loans outstanding (3).
The rules governing these loans are strict. According to the IRS, a 401(k) loan is not considered a taxable withdrawal if it does not exceed a maximum and is paid back within five years, with payments made at least quarterly. You can take longer to pay the loan back if you use the money to purchase your primary residence. The maximum you can borrow is 50% of the account balance or $50,000, whichever is less (4).
The advantages of borrowing from your 401 (k) — rather than cashing part of the balance — is that borrowers avoid paying taxes and the 10% early withdrawal penalty owed on distributions. Furthermore, most plans do not require a credit check to borrow from, and the interest paid on the loan is deposited back into the account of the borrower.
But as economists say, there are other hidden costs, including the opportunity cost of taking your money out of long-term investments. This means borrowers will miss out on any market moves and the compounding growth that occurs over decades.
Even though the borrower pays themselves interest, that interest rarely matches the potential long-term returns of a diversified stock portfolio during a bull market. This gap in compounding can result in a significantly lower final balance at retirement.
Navigating the trade-offs between leverage and long-term security
Green’s work and family situation may be stable enough to justify the risk of borrowing. But if a borrower leaves their employer, whether through a voluntary move or a layoff, many plans require the loan to be repaid in full within 60 to 90 days.
If the balance is not repaid by the deadline, the IRS treats the remaining amount as a distribution. For those under the age of 59.5, this triggers immediate income taxes and a 10% penalty, which will turn an investment strategy into a potential tax disaster during an already stressful job transition (5).
For those considering a 401(k) loan, it is vital to evaluate alternatives first. Programs like the HomeFirst down payment assistance program in New York City offer help to eligible buyers without requiring them to tap into their future savings (6).
Before following in Green’s footsteps, individuals should look at their specific plan policy to confirm maximum loan limits and repayment rules. It is essential to stress-test the decision by asking what would happen if a job loss occurred or if the real estate market softened.
A 401(k) loan can be a bridge to wealth, but it is a tool with sharp downsides that requires a stable income and a rigorous repayment plan to avoid a long-term retirement setback. Regardless of the potential for high returns in real estate, it’s best to beware of stacking multiple financial risks at once.
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Article Sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
Business Insider (1); Bureau of Labor Statistics (2; EBRI (3); Internal Revenue Service (4); Vanguard (5); New York City (6)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
