401(k) Loan vs. Withdrawal: What Taking Money Out Really Costs
Figures checked October 27, 2026 against primary sources
When money is tight, a 401(k) balance can look like the answer. There are two ways to get at it before retirement: borrow from it and pay yourself back, or take a withdrawal and pay tax on it. They cost very different amounts. This guide puts both side by side with the IRS rules that decide the cost, and a calculator for your own numbers.
The Short Answer
- A withdrawal before 59½ usually costs about a third or more up front: income tax plus a 10% additional tax, unless an exception applies. You also lose everything that money would have grown to.
- A 401(k) loan has no tax or penalty if you repay it on time. You can borrow up to half your vested balance, at most $50,000, and must repay within 5 years (longer for a home purchase).
- The loan's big risk is losing or leaving your job. An unpaid balance is taxed like a withdrawal unless you repay it or roll it over by your tax-return deadline.
- Not every plan offers loans or hardship withdrawals. Both are optional for employers; check your plan's summary or ask the administrator.
401(k) Loan vs Withdrawal Calculator
Enter how much cash you need, your vested balance, your tax rates and the loan rate your plan charges. The calculator works out how much you would have to withdraw to keep that amount after tax and penalty, and compares it with a loan's payment and effect on your retirement balance.
The loan rate starts at the bank prime rate plus one point as an example; your plan document sets the real rate. The investment return is an assumption you can change, not a forecast.
The Same $10,000, Two Ways
Hypothetical example, calculated with the calculator above: age 40, $60,000 vested, 22% federal and 5% state tax bracket, no penalty exception, an 8% loan rate over 5 years, and a 7% yearly return assumed until age 67.
| Withdraw | Borrow | |
|---|---|---|
| Taken out of the account | $15,873 | $10,000 |
| Income tax | $4,286 | $0 |
| 10% additional tax | $1,587 | $0 |
| Monthly cost | none | $202.76 for 5 years |
| Interest | none | $2,166, paid into your own account |
| What the money taken out would have grown to by 67 | $98,633 | about the same balance as never borrowing, at these assumptions |
To end up with $10,000 in hand, the withdrawal has to be almost $15,900, because about 37% of it goes to tax and the penalty. The loan's payments go back into your account with interest, so if you repay it on schedule your balance ends up close to where it would have been. That last line depends on the market: if your investments would have earned more than the loan rate during those five years, the loan costs you the difference.
Two costs the table does not show. Loan payments come out of your take-home pay, so they are made with money that has already been taxed. And if you cut your regular contributions to afford the payments, you lose those contributions and any employer match, which can cost more than the loan itself.
401(k) Loan Rules
The limits come from the tax code (section 72(p)) and the IRS's loan FAQs:
- How much: the lesser of $50,000 or the greater of $10,000 or 50% of your vested balance. The $10,000 floor is something a plan may allow, not a right. If you had another loan in the past 12 months, the $50,000 cap is reduced by that loan's highest balance minus what you still owe.
- How long: repaid within 5 years, in substantially equal payments of principal and interest made at least quarterly. Plans often take them from each paycheck. A loan to buy your main home can run longer.
- What it costs: the plan sets the interest rate and any setup fee. The interest goes into your own account, not to a bank.
- If you miss payments: the unpaid balance becomes a "deemed distribution," taxed like a withdrawal, including the 10% additional tax if you are under 59½, and it cannot be rolled over.
| Vested balance | Most you can borrow |
|---|---|
| $8,000 | $8,000 (if the plan uses the $10,000 floor), otherwise $4,000 |
| $16,000 | $10,000 (if the plan uses the floor), otherwise $8,000 |
| $60,000 | $30,000 |
| $100,000 or more | $50,000 |
Federal employees have their own version with different fees and rates: see TSP loan rules.
The Catch: Leaving Your Job
If you quit, are laid off or are fired with a loan outstanding, plans often give you a short window to repay it. If you do not, the plan cancels the loan against your account. The IRS calls this a plan loan offset: it counts as a distribution, so it is taxed, and penalized if you are under 59½ and no exception applies.
You can avoid that by putting the same amount into an IRA or a new employer's plan. For an offset caused by leaving your job or the plan ending, the IRS gives you until your tax-return due date for that year, including extensions, rather than the usual 60 days. You need the cash from somewhere else to do it.
In our example, a year into the loan you would still owe about $8,306. If you left then and could not repay or roll it over, the tax and penalty would be about $3,073. That job risk is the main reason a loan is not free money.
Withdrawals, Hardship and the 10% Penalty
While you still work for the employer, most plans only let you withdraw for a hardship. Under the IRS's hardship rules the need has to be "immediate and heavy," and the amount limited to what you need, which can include the tax the withdrawal itself triggers. Expenses the IRS treats as automatically qualifying include:
- medical care for you, your spouse, dependents or beneficiary;
- costs directly tied to buying your main home (not mortgage payments);
- tuition, fees and room and board for the next 12 months of college;
- payments to prevent eviction from your main home;
- funeral expenses;
- certain repairs of damage to your main home.
A hardship withdrawal is taxed as income (except Roth money already taxed) and the 10% additional tax may apply. Unlike a loan, it cannot be paid back into the plan or rolled over. After you leave the employer you can usually take any amount, under the same tax rules; a cash payout from the plan has 20% withheld for federal tax unless it goes directly to another plan or IRA, and that withholding is a prepayment, not the final bill.
When There Is No 10% Penalty
The 10% additional tax applies to withdrawals before age 59½ unless one of the IRS's exceptions fits. For a 401(k) they include:
- Leaving your job in or after the year you turn 55 (50 for qualified public safety employees): the rule of 55. It covers the plan of the employer you left, not IRAs.
- An emergency personal expense: one withdrawal a year of up to $1,000.
- Birth or adoption: up to $5,000 per child.
- Victims of domestic abuse: the lesser of $10,000 or 50% of the account.
- A federally declared disaster: up to $22,000.
- Unreimbursed medical expenses above 7.5% of your adjusted gross income.
- Total and permanent disability, terminal illness, death, a divorce order (QDRO), an IRS levy, and a series of substantially equal payments.
An exception removes only the 10% additional tax. Income tax is still due on pre-tax money. Some popular IRA exceptions, such as first-time home purchase and college costs, do not apply to 401(k) withdrawals.
Using Your 401(k) to Pay Off Debt
Paying off credit cards with a withdrawal swaps a debt you could repay for a permanent loss: in our example, about $5,900 of tax and penalty to clear $10,000 of debt, plus the growth that money would have earned. Paying off credit cards is also not on the IRS's list of expenses that automatically count as a hardship.
A loan is cheaper, but it only moves the debt: you still owe the money, now with job-change risk attached. It works best when the debt's rate is far higher than the loan rate, your job is stable, and the cards that caused the problem will not fill up again. Before either, compare a structured payoff plan (snowball or avalanche), a consolidation loan, or a nonprofit credit counselor. Your debt-to-income ratio shows how stretched your monthly payments are now.
If your debts are past the point of a payoff plan, talk to a nonprofit credit counselor or a bankruptcy attorney before you empty a retirement account to pay them: they can tell you which debts and assets are at stake.
FAQ
How much can I borrow from my 401(k)?
Up to half of your vested balance, with a maximum of $50,000. If half your balance is under $10,000, a plan may let you borrow up to $10,000. Your plan can set lower limits or offer no loans at all.
Is it better to take a 401(k) loan or a hardship withdrawal?
If you can repay it and your job is stable, a loan usually costs far less, because it avoids income tax and the 10% additional tax. A hardship withdrawal makes sense mainly when you cannot afford loan payments, and it cannot be paid back into the plan later.
What happens to my 401(k) loan if I quit or get fired?
You usually have to repay it soon after you leave. If you do not, the unpaid balance is treated as a distribution and taxed, plus the 10% additional tax if you are under 59½, unless you roll the same amount into an IRA or another plan by your tax-return due date, including extensions.
How much tax will I pay on a 401(k) early withdrawal?
Your regular income tax rate on the amount, federal and state, plus 10% if you are under 59½ and no exception applies. At a 22% federal and 5% state rate, that is about 37% of the withdrawal. A large withdrawal can also push part of your income into a higher bracket.
Can I use a 401(k) loan to buy a house?
Yes, if your plan allows loans, and a loan for your main home can have a repayment period longer than five years.
This article is for general information and is not tax or financial advice. Loan, hardship and penalty rules are from IRS.gov, read on 2026-10-27. The example is hypothetical; returns are assumptions and tax is estimated at marginal rates. Check your plan's summary plan description for its own loan and withdrawal rules.
