401k Loan vs Early Withdrawal
Compare the true cost of borrowing from your 401k versus taking an early withdrawal. See tax penalties, opportunity cost, and long-term retirement impact side-by-side.
Shared Inputs
401k Loan
Max: 50% of vested balance or $50,000, whichever is less
Typically prime rate + 1% (you pay interest to yourself)
Early Withdrawal
Head-to-Head Comparison
| Metric | 401k Loan | Early Withdrawal |
|---|---|---|
| Amount Needed | ||
| Total Out-of-Pocket Cost | ||
| Opportunity Cost | ||
| Net Retirement Impact (10yr) | ||
| Net Retirement Impact (30yr) |
Retirement Impact Over Time
5 Years
Loan
Withdrawal
10 Years
Loan
Withdrawal
20 Years
Loan
Withdrawal
30 Years
Loan
Withdrawal
Break-Even Analysis
✓ 401k Loan Wins
A 401k loan saves you compared to an early withdrawal. The loan becomes the better option because you repay yourself with interest, avoid the 10% penalty, and keep your money growing tax-deferred.
⚠ Withdrawal May Be Better
In this scenario, the early withdrawal costs less than the loan. This is unusual and typically happens with very small amounts or low tax brackets. Consider consulting a financial advisor.
Disclaimer: This calculator is for educational purposes only and does not constitute financial advice. 401k rules vary by plan and are subject to IRS regulations. Consult a qualified financial advisor or tax professional before making decisions about your retirement accounts. Results assume constant market returns and do not account for inflation, plan-specific fees, or changes in tax law.
Quick Answer: Should I Take a 401k Loan or Early Withdrawal?
In most cases, a 401k loan is significantly cheaper than an early withdrawal. A $50,000 early withdrawal from a Traditional 401k could cost $16,000+ in taxes and penalties (10% early penalty + federal/state income tax), while a 401k loan lets you repay yourself with interest and avoid penalties entirely. However, a loan carries the risk of default if you leave your job.
Key Takeaways
- 401k loans avoid the 10% early withdrawal penalty entirely — you repay yourself with interest
- Early withdrawals from Traditional 401ks incur income tax PLUS a 10% penalty if under 59½
- Roth 401k contributions can be withdrawn tax-free, but earnings may still face penalties
- Both options carry opportunity cost — money removed from your account misses market growth
- 401k loans typically must be repaid within 5 years (longer for home purchases)
- If you leave your job with an outstanding loan, it may become due immediately or be treated as a withdrawal
How 401k Loans Work
A 401k loan allows you to borrow up to 50% of your vested account balance or $50,000, whichever is less. You repay the loan with interest through payroll deductions over a maximum of 5 years (or 15 years for a primary residence purchase). The interest you pay goes back into your own 401k account.
How Early Withdrawals Work
An early withdrawal from a Traditional 401k before age 59½ triggers a 10% penalty on top of ordinary income tax. For someone in the 22% federal bracket with 5% state tax, a $50,000 withdrawal costs $18,500 in taxes and penalties — meaning you'd need to withdraw about $61,000 to net $50,000 in cash.
Key Differences at a Glance
| Feature | 401k Loan | Early Withdrawal |
|---|---|---|
| 10% Penalty | None | Yes (if under 59½) |
| Income Tax | None | Yes (Traditional) |
| Repayment Required | Yes (5 years max) | No |
| Impact on Balance | Temporary | Permanent |
| Job Change Risk | Loan may be due | No risk |