Due to recent changes in the law, the lines between a 401(k) loan and withdrawal can become a bit blurred. Both let you access up to $100,000 of your retirement funds penalty- and tax-free, but there are slight differences.
If you take a withdrawal:
- Repayment isn’t required.
- There’s no withdrawal penalty.
- It will be taxed as income initially, though you can claim a refund if you pay back the distribution in three years.
- You have tax options.
If you take a loan:
- Repayment is required within a specified time frame, typically five years.
- The loan amount is not taxed initially, and there is no penalty. However, if you can’t pay it back in five years, the outstanding balance will be taxed as if it were a withdrawal, and you’ll also pay the 10% early withdrawal penalty.
- All loan payments due in 2020 can be delayed for up to one year from the time you take out the loan.
- If you leave your job, you have until mid-October of the following year to pay back the entirety of the loan. If you don’t pay it back, you’ll be hit with early withdrawal taxes and penalties.