Suze Orman’s 401(k) Rule: Invest, But Never Use For This

The Risks of Taking a Loan from Your 401(k)

Taking a loan from your 401(k) is often considered one of the worst financial decisions you can make. This perspective has been consistently emphasized by personal finance expert Suze Orman, who has repeatedly warned against using retirement savings for short-term needs. Her stance was clearly articulated in a 2026 episode of her podcast Women and Money, where she advised a 50-year-old caller with $33,000 in divorce-related debt not to tap into her $87,000 401(k) account. The reasoning behind this advice is rooted in both financial logic and long-term consequences.

The Double-Taxation Trap

A traditional 401(k) allows you to contribute pre-tax dollars, which means your contributions reduce your taxable income now. However, when you take a loan from your 401(k), you repay it with after-tax dollars. This creates a double taxation issue: the money you repay is taxed again when you withdraw it in retirement. Additionally, you typically pay interest on the loan, which further compounds the financial burden.

The situation becomes even riskier if you lose your job while the loan is outstanding. In such cases, the entire remaining balance of the loan may become due immediately. If you fail to repay it, the IRS treats the unpaid amount as a distribution, subjecting it to ordinary income tax and a 10% early-withdrawal penalty for those under age 59 1/2.

Data from Vanguard’s 2025 report highlights the prevalence of this issue. It found that 13% of participants carried a 401(k) loan during 2024, with an average outstanding balance of about $10,700. Hardship withdrawals tell a more concerning story: 4.8% of participants took one in 2024, up from roughly 2% before the pandemic. By 2025, that rate climbed to 6%, a record high, according to a preview of Vanguard’s 2026 annual report. A separate survey by Alight revealed 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

Financial experts universally advise exploring alternatives before tapping into a 401(k). Kai Walker, managing director of Retirement Research and Inclusion Transformation at Bank of America, emphasizes the importance of considering other options. “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,” he says.

Personal loans or home equity loans are often suggested as better alternatives, but even these should be discussed with a financial advisor before proceeding. James B. Twining, CFP, CEO and founder of Financial Plan Inc., points out the hidden cost of 401(k) loans. “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%.”

Securian also highlights the compounding impact of reducing your 401(k) balance. “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.”

The 2026 Podcast Moment That Said It All

Orman’s firm stance was evident 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 directed Andrea to NFCC.org, the National Foundation for Credit Counseling, which offers assistance in negotiating lower rates with creditors.

The core principle Orman emphasized is that money inside a 401(k) is protected from creditors, even in bankruptcy. Once funds leave the account, that protection is gone. Unsecured debt, however, can often be restructured through negotiation, balance-transfer cards, debt consolidation, or even bankruptcy. Using protected retirement funds to pay off debt that can be restructured is rarely a sound financial decision.

Focus on Contributing, Not Borrowing

The IRS increased 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, 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. 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.

The consensus among financial planners is clear: leave your retirement account untouched. The 401(k) is designed to grow over decades, and every dollar borrowed is a dollar that stops growing. If a financial emergency demands action, explore all other options first and consult a certified financial planner before touching any retirement savings.