HELOC vs. 401(k) Loan: Which One Destroys Your Wealth Less?

The Danger of "Paying Yourself Back"

When you need large cash, you might look at your 401(k) balance. Most plans allow you to borrow up to $50,000 or 50% of your vested balance. The interest rate is low, and the interest is paid back into your own account. It sounds perfect. It isn't.

The Hidden Cost: Market Opportunity

When you take $50,000 out of a 401(k), that money is sold out of the stock market. It sits on the sidelines. If the S&P 500 goes up 20% while your loan is outstanding, you didn't just pay interest—you missed out on $10,000 of growth. That growth compounds over 20 years to become a massive hole in your retirement nest egg.

The Trap: Job Loss

This is the biggest risk. If you have a 401(k) loan and you get laid off or quit, the entire loan balance is usually due within 60 days. If you can't pay it back, the IRS treats it as a "Withdrawal."

• income Taxes due immediately.
• 10% Early Withdrawal Penalty (if under 59.5).

A HELOC, by comparison, doesn't care if you lose your job as long as you keep making the monthly payments.

Comparing the Costs

• HELOC Cost: ~9% Interest paid to the bank. Tax Deductible (maybe).
• 401(k) Loan Cost: ~0% Real Interest (paid to self), BUT potentially huge lost market gains + double taxation on repayments.

Verdict: Use a HELOC for almost everything. Only touch the 401(k) as a desperate last resort to prevent foreclosure.