A 401(k) loan might sound basically the same as an early withdrawal — but there's a major difference. According to Investopedia, you must repay a 401(k) loan; you don't need to pay back an early withdrawal.
When you take out a loan from your 401(k) account, you're doing what's called borrowing against yourself. In 2020, the government allowed people to borrow up to 50% of the value of their 401(k) account up to $100,000, according to Pence. This limit was increased due to the COVID-19 pandemic. "[This year], the limit goes back to normal, which is $50,000," Pence said. "You have five years to pay it back unless you are using the funds to buy a home." If you're strapped for cash, this might sound appealing since you're paying yourself back and still gaining interest.
However, you shouldn't default to borrowing from your retirement account unless you've truly exhausted all other ideas. "It’s an option, but we don’t recommend it if you can get the money somewhere else. When you borrow your own money, you’re paying yourself back at a low interest rate. Your money won't grow as much as it would if you had just left it alone."