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repay the loan are not pre-tax deductions. So you actually pay tax on this loan twice. Once when you are paid and again when you withdraw the money after retirement.
• If you leave the employer before you finish paying off the loan, you will have to repay the balance you still owe immediately, usually within 60 days and sometimes less. If you don’t pay it back in this amount of time, your loan becomes a default and you have to pay the additional taxes and penalties that accom- pany a withdrawal from your 401(k) when money is taken out before you retire.
Withdrawing from Your 401(k)
If you take a withdrawal from your 401(k) before you are eligible to make retirement withdrawals, you will lose money. There is no way to take a withdrawal without doing so. If you must take money from your 401(k), it is better to take a loan if at all possible.
Withdrawals are only available under very special circumstances and are divided into two categories—hardship withdrawals and non-financial hardship withdrawals. For any of these withdrawals, you are required to pay taxes on the amount you withdraw. Hardship withdrawals also require a 10% penalty payment on the amount borrowed. Withdrawals cannot be repaid so that penalty and tax money is lost to you forever.
Hardship withdrawals can be taken if:
• There is an immediate and severe financial need
• The withdrawal is necessary to meet that need because you cannot get the money anywhere else
• The amount you wish to withdraw does not exceed the amount of the need
• You have already taken all the loans available under your 401k plan
Where Should I Save My Money?