The maximum loan amount from a retirement fund, such as a 401(k) plan, is generally capped at 50% of the account balance, up to $50,000. This limit applies regardless of the account holder’s age. Borrowers must repay the loan within five years, though some plans allow longer terms for loans taken after age 55. The primary purpose is to provide flexibility for financial needs without triggering taxes or penalties typically associated with early withdrawals.

The 50% cap and $50,000 maximum were established by the IRS to balance accessibility with retirement security. Excessive borrowing could deplete funds needed for long-term savings, increasing retirement risk. Data from the 2023 IRS retirement plan guidelines confirms these limits, which apply to most employer-sponsored plans. A 2022 study by the National Bureau of Economic Research found that 40% of 401(k) borrowers repay loans within three years, suggesting the five-year term is sufficient for most needs. However, the 50% threshold is often criticized as overly restrictive, as high balances (e.g., over $100,000) may leave little room for borrowing. For example, a $200,000 account allows a $100,000 loan, which could strain repayment capacity. The five-year rule also assumes steady income, but economic downturns may hinder timely repayment. While the system aims to prevent irreversible financial harm, critics argue that stricter limits or alternative borrowing mechanisms, such as Roth IRA loans, could offer better flexibility. Ultimately, the 50% cap and five-year repayment period reflect a compromise between immediate financial relief and long-term retirement planning stability.