401k Loan vs Withdrawal Calculator
Compare the true cost of borrowing from your 401(k) vs taking an early withdrawal. 401(k) loans avoid tax + penalty but suspend growth on the borrowed amount. Withdrawals trigger 10% early-withdrawal penalty (under 59½) + ordinary income tax + lost compounding. The Secure 2.0 Act (2023) added new hardship exceptions and emergency-savings rules.
401(k) Loan — Rules
Maximum: lesser of 50% of vested balance OR $50,000. Must be repaid within 5 years (up to 30 years for primary residence). Interest rate: typically prime + 1-2%. Interest paid back to your own account. Loan triggers: most plans allow up to 2 outstanding loans simultaneously. Job loss: loan becomes due in full within 60-90 days under most plans; Secure 2.0 extended to next tax-filing date. Unrepaid balance becomes a deemed distribution — full tax + 10% penalty (if under 59½).
401(k) Withdrawal — Penalty + Tax
Under age 59½: 10% federal early-withdrawal penalty (some states add state-level penalty) PLUS ordinary income tax at marginal rate. So a $10,000 withdrawal in a 24% bracket leaves only $6,600 net. Hardship withdrawal exceptions (no penalty but still tax): medical expenses >7.5% AGI; first-home purchase up to $10K; college; disability; IRS levy; substantially equal periodic payments (SEPP). Secure 2.0 added new exceptions: birth/adoption (up to $5K), domestic abuse victim ($10K), terminal illness, federally-declared disaster, emergency personal expense ($1K once per year).
The Hidden Cost — Lost Compounding
Withdraw $25K at age 35 from a balance earning 7% annually → $25K compounded over 30 years = $190K opportunity cost at age 65. Even the loan path loses growth: borrowed dollars earn the loan interest rate (~9%) instead of stock-market returns (~10% historical S&P 500). Over a 5-year loan, that's a 1% drag × principal — small but real. The biggest financial-planning cost is rarely the penalty; it's the lost decades of compounding.
When 401(k) Loan vs Withdrawal Makes Sense
Loan if: stable employment, short-term cash need, can fully repay within 5 years, alternative borrowing rate is higher. Withdrawal if: under 59½ with a qualifying exception (no 10% penalty); over 59½ (no penalty anyway); job-loss imminent (loan would be deemed distribution anyway, so accept the same tax + penalty); medical or other emergency with no other source. Avoid both if: HSA, emergency-fund, brokerage account, or 0% APR credit card available; if exhausting 401(k) breaks the retirement plan.
Sources: IRC §72(t) (early-withdrawal penalty), IRC §72(p) (loans), Secure 2.0 Act 2022 (P.L. 117-328), IRS Publication 575. Last updated: May 2026. Not financial advice.
Frequently Asked Questions
What is the difference between a 401(k) loan and a withdrawal?
A loan is borrowed money you must repay (typically within 5 years, with interest paid back to your own account) — no tax, no penalty. A withdrawal is a permanent distribution — taxed as ordinary income AND subject to 10% early-withdrawal penalty under age 59½.
What are the limits on 401(k) loans?
Maximum: lesser of 50% of vested balance OR $50,000. Most plans allow up to 2 outstanding loans. Repayment 5 years (30 years for primary residence purchase). Interest rate typically prime + 1-2%. Job loss triggers immediate repayment (Secure 2.0 extended grace to next tax-filing date).
Are there hardship exceptions to the 10% penalty?
Yes — IRC §72(t) exceptions: medical expenses >7.5% AGI, first home (up to $10K), college, disability, IRS levy, substantially equal payments (SEPP), separation from service after age 55. Secure 2.0 added birth/adoption ($5K), domestic abuse ($10K), terminal illness, disaster, emergency personal ($1K).
What happens if I can't repay the 401(k) loan?
Unrepaid balance becomes a 'deemed distribution' — fully taxable as ordinary income + 10% penalty if under 59½. Most plans give 60-90 days after job loss (Secure 2.0 extended to next tax-filing date). The plan reports a 1099-R for the deemed distribution amount.
Should I cash out my 401(k) when changing jobs?
Almost never. Better options: (1) Leave it with old employer's plan. (2) Roll over to new employer's plan. (3) Roll over to traditional IRA (more investment options). All three avoid tax + penalty. Cashing out triggers immediate ~37-50% combined tax + penalty + state.