Should I Take a 401(k) Loan or an Early Withdrawal?

Name: Should I Take a 401(k) Loan or an Early Withdrawal?
Author: Acun Özdilek

Should I take a 401(k) loan or an early withdrawal? Usually the loan, because a withdrawal is taxed and penalised on more than the cash you need.

Example numbers

Cash you need

Employer match you’d lose each year while repaying

Vested 401(k) balance

Your age

40 years old

Years until you might leave this job

Assumptionsannual salary $75,000, filing status single, state and local income tax rate 4% and 5 more

Annual salary

Filing status

State and local income tax rate

Your 401(k) contribution

Health premiums and other pre-tax deductions

Plan loan interest rate

Years to repay the loan

Expected annual return

The verdictfrom an example

Take the loan. Withdrawing instead would leave you $2,082 worse off after 5 years, unless repaying would cost you more than $472 a year of employer match.

Worked on $10,000 needed, $75,000 salary, age 40, 4% state tax, 8.5% loan over 5 years. Change anything below to use yours.

Withdrawal needed: $15,625
Loan payment: $205.17
Loan's lead after 5 years: +$2,082

The figures behind it

Withdrawal needed: $15,625; Before tax, to net $10,000 after $3,437.50 federal tax, $625.00 state tax and a $1,562.50 early-withdrawal penalty. The tax uses the salary under Assumptions.
Loan payment: $205.17; A month for 5 years if you stay, $2,310 of it interest, assumed credited back to your own account. Plans usually take it from each paycheck.
Loan's lead after 5 years: +$2,082; After-tax dollars. The 401(k) is valued after the 26% income tax this withdrawal pays.
Lost match that flips it: $472 a year; The match you’d give up each year while repaying, above which the withdrawal comes out ahead.

Payment scheduleShow

Year	Paid	Interest	Balance
1	$2,462	$786	$8,324
2	$2,462	$638	$6,499
3	$2,462	$476	$4,513
4	$2,462	$301	$2,352
5	$2,462	$110	$0

What this result assumes

Worked on 2026 federal brackets. The withdrawal is grossed up so that $10,000 is left after federal income tax on top of your salary, state tax at your rate and the 10% early-withdrawal penalty.
The tax shown is what you owe, not what is withheld: a plan withholds a flat share and the rest is settled on your return.
The 401(k) is valued after tax at the same rate this withdrawal pays, federal plus state. A lower rate in retirement makes the withdrawal look worse than shown. With no lost match, that favours the loan.
The loan payments are treated as money you would otherwise have saved at the same return.
The penalty applies before age 59½, and to an unpaid loan only if you leave your job before the year you turn 55. Other exceptions are not modelled.
If you leave this job before the loan is repaid, the balance still owed becomes taxable income that year, plus the penalty if you leave before the year you turn 55. Set the years until you might leave to see it.

Enter the cash you need, your balance and your pay. You will see what each option leaves you after the loan term, and how much lost employer match would tip the answer the other way.

Methodology

Reviewed October 4, 2026 by Acun Özdilek

Why a withdrawal costs more than its tax

A withdrawal is taxed on the whole amount you take out, and so is the early-withdrawal penalty. To end up holding the cash you need, you have to take out more than that cash: the amount you need divided by one minus your combined tax and penalty rate. That bigger amount leaves the account and stops growing.

The tax is worked out on top of your salary, the way the take-home pay calculator does it, so a large withdrawal can push part of it into a higher bracket. A loan takes out only the cash you need, and you repay it into your own account.

Why leaving your job early doesn’t turn the answer toward a withdrawal

Before age 59½, leaving your job early does not turn the answer toward a withdrawal. If you entered a lost match, leaving sooner can tip it toward the loan, because the match stops being lost when you leave. If you leave while a loan is unpaid, the balance still owed is treated as a withdrawal and taxed as income that year. The tax falls on that balance alone and is not grossed up, because you never took the balance out in cash. A withdrawal is taxed on the larger grossed-up amount.

Plans usually take loan payments from each paycheck, so the calculator has you stop paying when you leave. It also assumes your salary in the leaving year matches today’s.

What can flip the answer, and how it is scored

Loan payments reduce your take-home pay. If that makes you cut your own contribution below the level that earns the full employer match, you give up free money for as long as you repay. A withdrawal has no payment, so the person who withdraws keeps the match. The calculator finds the yearly amount of lost match at which the two options come out even. To see what a match is worth against other uses of cash, try 401(k) match or pay off debt.

Both options are scored in after-tax dollars at the end of the loan term, against not touching the 401(k) at all. After the term, every remaining difference grows at the same return, so the gap can grow, but its sign does not change. The 401(k) is valued after the same income tax rate the withdrawal pays. To project the account without a loan, use the 401(k) calculator.

Under the early-withdrawal age the withdrawal costs more before any lost match is counted, but the two can land close together, and the calculator says so when they do. A close result comes down to monthly cash flow.

Assumptions

State tax is one flat rate on the amount withdrawn.
Your salary in the year you leave is the same as today’s.
You have taken no other plan loan in the past 12 months.
Before 59½, the law lets you take your own 401(k) contributions out while still employed only for a hardship. The calculator assumes you can withdraw.
The 401(k) is valued after the same income tax rate the withdrawal pays, rather than a rate you might face in retirement.
With a withdrawal, the money you would have paid toward a loan is saved instead and earns the same return.
Returns arrive smoothly at the rate entered. Ups and downs in the market are not modelled.
The account is a traditional pre-tax 401(k). Roth money, hardship rules and penalty exceptions other than the age rule for leaving your job are not modelled.

Sources

Common questions

What happens to a 401(k) loan if I leave my job?

If you don’t repay it when you leave, the balance still owed is treated as a withdrawal and taxed as income for that year. The 10% penalty is added if you are under 59½ and leave before the year you turn 55. You can avoid the tax by putting the same amount into an IRA or a new employer plan by your tax-return due date, extensions included. Before age 59½, leaving early does not turn the answer toward a withdrawal here, because the unpaid balance is taxed once, without the gross-up a withdrawal needs.

Is the interest on a 401(k) loan wasted?

This page assumes the interest you pay is credited back to your own account, as is typical; your plan’s loan notice says how yours works. The cost is that the borrowed money stops growing while it is out, and loan payments come out of pay that has already been taxed. The calculator counts both.

How much can I borrow from my 401(k)?

The law allows up to 50% of your vested balance, capped at $50,000, and plans can set tighter limits. Repayment can run up to 5 years, longer for a loan to buy your main home. When your cash need is bigger than the limit, the calculator withdraws the rest and taxes it. Your plan administrator can tell you your own limit.

Do I pay the 10% penalty on a 401(k) loan?

Not while you keep repaying it, because a loan on schedule is not a withdrawal. The penalty can apply only if the loan goes unpaid and becomes a withdrawal, and then only under 59½ and without an exception. A hardship withdrawal is a different thing: it is taxed, and the penalty applies unless an exception fits.

Should I stop contributing while I repay?

Cutting your contribution below the level that earns the full employer match is what can turn the answer toward a withdrawal. Enter the match you would give up in a year in the calculator to see where that tips. The take-home pay calculator shows how the loan payment changes each paycheck.

When is a withdrawal the better choice?

When the loan would cost you more in lost employer match than the withdrawal costs in extra tax and penalty, or when your plan offers no loan. Under 59½ and still employed, a withdrawal usually means a hardship withdrawal, which you must qualify for. Once you are past the penalty age the two options often finish close together, and then the monthly payment decides. Plan rules vary, so check yours.

All retirement →

Result