No Home as Collateral

• When you take out a home-equity loan, you use your home as collateral, which means that if you fail to repay the loan, the bank can take your home. With a 401k plan loan, if you fail to repay it, the IRS considers the money distributed and you will owe income taxes and early withdrawal penalties.
  
  

No Tax Benefits

• The interest on the first $100,000 of a home-equity loan ($50,000 if you are married filing separately) can be deducted from your income taxes if you itemize your deductions. The IRS does not allow deductions on any of the interest paid on a 401k plan.
  
  

Bottom Line

• Before taking a 401k plan loan, consider the after-tax cost of the home-equity loan. According to Schwab, home equity loans often have a lower interest rate, so you should use them rather than borrowing from your retirement funds.