401k loan or withdrawal

Mid 30s have roughly 400k in 401k account.

Need to pull out roughly 25-30k from 401k.  What is the better option?? obviously the loan you repay yourself back or do you just bit the bullet, pay the taxes (25%) as well as the irs fee come tax time for early withdrawal (10%) and out of sight out of mind??  

Being this young my financial advisor says..... Take a loan from the 401k and that way you're paying the 401k back to yourself. Your paying yourself the interest charged. Set up re-payment for 5 years or whateever your plan allows. No fees or penalties ..... Payroll deduct so don't quit until loan paid in full or the fun starts... 

Yeah loan is the best idea the interest goes to you but find out what fees and crap the company charges you for this service.

I would recommend doing all you can NOT to take any out at all.  Needing and desiring 25-30k are very different.  I would really look hard at that first.

You are taking a hit with the penalty and taxes and will have to repay this loan with after-tax money when, hopefully, you are investing with pre-tax money.

If you have your money in an S&P type fund you have made around 20% for the year.  If you take this money away you are essentially taking out a 20% loan.

Some 401Ks have rules on whether you can still contribute while repaying a loan; some have rules that halt a company match while there is a loan against it.

Verify and think about all of these things before taking out a loan.

I always tell folks NOT to take out a loan UNLESS there is absolutely nothing else that can be done.

If you have that much in your 401k and your bills are caught up and your credit is decent, you should be able to get a loan somewhere else, somehow.

Assuming you are maxing out on your 401k -- which you should be doing at your age -- this is a big, big hit to your longterm retirement savings.

There are various calculators online that will show you how much money you are potentially losing in the long run.

Depending on the job situation, there can be issues with what happens should you lose your job while repaying.

This can also cause bad financial decisions later.  A lot of folks that start taking loans continue to do so throughout their career, etc.

These folks are also rarely the types, or are not in the situation, to be able to pay the loan off early.  Sometimes the plans will not let you pay it off in larger amounts than the agreed amount -- unless you pay it off all at once.

There are even cases to be made, when looking at all of these factors, to just withdraw it and pay the penalty and the taxes and NOT do a loan.  This is especially true if there are issues with the plan on how soon you can get back to full contribution and company match.

I would NOT take it out UNLESS totally needed and there are NO other alternatives.

IF you DO take it out I would just withdraw it and take the hit.  This would get you back to investing quicker and easier because you will NOT have to be repaying money.

BUT do NOT let it be the start of a trend.

You have more than the average person at your age saved, so you seem to not have many issues with finances. Congratulations on that!

I would take a withdrawal IF YOU HAVE to have the money and cannot find another way to get a loan AND if it is not the start of a bad trend.

Good luck with whatever you decide to do. 

@skoda

While this is true, he is not pointing out a lot of other issues with this; or is not aware of them.  It always sounds good, as if you are making out with a cheap loan; it does not consider many other longterm retirement and investing issues and the psychological mindsets of folks.

It is a very case-by-case decision.  He is right that that is the general rule-of-thumb most people give.  But it considers short term numbers only and assumes people will always do what they should after that, etc. 

@Raiders22

 great breakdown and great knowledge, thank you!  I still would contribute my 15% if i did take the loan over the withdrawal, not sure if that matters in your breakdown.  Part of me says ok just do the loan, repay yourself, save on fees and taxes and still contribute 15% while also repaying the loan in each pay cycle.  The other part of me says just withdraw, deal with the fees, taxes, penalty and be done with it (instead of having a 5 year loan hanging over my head).  Just not sure what way to go…. thanks again 

Then that is best for you if you feel that way about the loan.  That means you have the mindset to stick with it.  I agree, I would not want a 5 year loan.  Can you pay back sooner?  Is it allowed to pay extra?

Both sides have good points. 

@Raiders22

 what option would you choose? you gave alot of great pointers from both sides….

@young1jesus

 I do not like bills and loans.  But I hate that you HAVE to do it.  So, it is a personal decision.

If you cannot pay back sooner and have to take the full 5 years that is tough.

But you do pay it back to yourself with interest.

You say you do not have to stop or slow down contributing.  Does the company match get slowed down or stop?

IF I HAD to do it -- I take the withdrawal AND try to never be in a situation to have to do it again.

But I am okay if you do the loan -- just do not do it again. 

@Raiders22

 the company match does not stop, & yes i can attempt to pay it off sooner.  And that is the plan if i go loan route.  If i go withdrawal amount, its honestly just out of sight out of mind done.  Although taxes & penalty would suck but whatever i guess thats why i contributed aggressively from the start & have a nice chunk in there now.Would keep contributing my 15% & move forward.  Appreciate all your insight.

@young1jesus

Take the loan route.  If it gets too tough, unless they’re matching 100% of your contributions, then drop your contribution to 10%, and payback the loan as fast and as comfortable as you can manage.