Learn more about taking a loan
If there’s no other source you can turn to for desperately needed money, consider taking a plan loan before a withdrawal. Even if you have an outstanding loan, it might make more sense to pay off your existing loan and take another rather than make a withdrawal.
A plan loan is generally a better option than a straight withdrawal. When you take a loan, you borrow from your plan and repay it to your account over time with interest. It’s a better idea than a straight withdrawal because you put the money back into your plan and you aren’t liable for additional taxes if you pay it back. However, there are a few caveats associated with a loan.
First, taking a large-sum loan and paying it back over time means that money won’t be able to grow and compound. The larger your account balance is, the more it has the potential to take advantage of long-term market growth.
Second, if you terminate employment with your current employer, your loan may become due unless you have the option of continuing to make payments via ACH in your plan. Review your plan rules or Summary Plan Description to verify. If you default, the loan payoff balance will come out of your retirement plan account balance which counts as a cash distribution. That means you’ll pay taxes and the 10% tax penalty on that payoff.
While there aren’t taxes associated with taking a loan, certain fees do apply. These fees differ from plan to plan.