As a general rule, you are not taxed when you take out the loan. The following conditions must be present to avoid taxation when the loan is made. The plan loan is required to be repaid in full within five years unless the loan is used to buy the employee's principal residence.  The loan provisions must require substantially equal amortization of principal and interest and payments must be made at least quarterly. As an example, a five-year loan with interest only payments and a balloon payment at the end of the period will not qualify.  The loan must be supported by a legally enforceable agreement. The loan is limited to the lower of: (1) $50,000; or (2) one-half of the employee's vested accrued benefit.