A 401(k) withdrawal before age 59 1/2 can result in IRS penalties, taxes, and missed growth potential. Rules and differences between withdrawals and loans are explored. Traditional 401(k) withdrawals are taxed as ordinary income, while Roth 401(k) withdrawals offer potential for tax-free income after age 59 1/2.

Early 401(k) withdrawals incur a 10% penalty in addition to taxes. Rules vary for traditional and Roth 401(k) accounts. Exceptions to the penalty include hardship withdrawals, Rule of 55, and substantially equal periodic payments. The Secure Act 2.0 allows for penalty-free emergency withdrawals for specific circumstances.

A 401(k) loan allows borrowing from retirement funds without taxes or penalties, with repayment plus interest required. Repayment timelines vary, but leaving your job can expedite repayment. Consider alternatives to 401(k) loans, such as savings accounts, Roth IRAs, health savings accounts, or home equity options.

Taking a 401(k) loan is generally preferable to a withdrawal if you intend to repay it, as interest paid on the loan is less than potential taxes and penalties. However, job stability is crucial for loan repayment. Starting to invest again after a withdrawal or loan is advised, especially for those aged 50 and above.

401(k) loans do not affect credit scores, but defaulting on them may lead to a significant tax bill. Cashing out a 401(k) early results in a mandatory 20% tax withholding, potentially leaving you with less than the full balance. Withdrawing money to pay off debt is possible but generally not recommended due to taxes and penalties.

Read more at Yahoo Finance: How to withdraw money from your 401(k)