Cash Withdrawal vs 401(k) Loan
Early 401(k) withdrawal costs penalty + tax + lost growth. 401(k) loan is cheaper but risks default on job change. HELOC offers low rate. This compares 3 options.
| Cash needed | — |
| Withdrawal: penalty + tax | — |
| Withdrawal: lost growth | — |
| Withdrawal TOTAL | — |
| 401k loan interest | — |
| 401k loan lost growth | — |
| 401k loan TOTAL | — |
| HELOC interest | — |
| Best option | — |
Three main paths to access cash: 401(k) early withdrawal (catastrophic — penalty + tax + lost growth), 401(k) loan (5-year max, interest to yourself, job-change risk), HELOC (secured by home).
401(k) Early Withdrawal Cost
10% penalty (under 59.5) + ordinary income tax (federal + state). On $30K withdrawal: $3K penalty + $7,200 federal tax (24%) + $1,500 state = $11,700 immediate. Plus you lose decades of compound growth on the withdrawn amount.
401(k) Loan Mechanics
Borrow up to 50% of vested balance or $50K (whichever less). Repay with interest to yourself over 5 years (longer if for primary residence). Interest is post-tax (no deduction). On job change, must repay outstanding balance within 60-90 days or it converts to early withdrawal.
HELOC Trade-Offs
Variable rate tied to prime (currently 8-10%). Secured by home (default risk). Interest deductible only for substantial home improvement per TCJA. Draw period 10 years typical, then 20-year repayment.
Emergency Fund First
None of these should be the first move. Build 3-6 months expenses in high-yield savings BEFORE taking any retirement-impacting loan. The 4-5% APY beats the certainty of penalty + tax + lost growth.
Last updated May 2026. Sources: IRS Pub 590-B, DOL 401k Loans.