Difference between taking a distribution or a loan from your retirement account?

Updated: Jul 11, 2018

In one's lifetime, there may be certain circumstances that require you to pull money out of a retirement account. Given that, knowing the difference between taking a loan vs a distribution from your retirement account is important to know.

A distribution ( also known as a withdrawal ): is when one pulls money from their retirement account. By doing this, a taxable event will be triggered if the money pulled out is not paid back to the retirement account in full within 60 days. If the money is not paid back within the 60 days, on top of a taxable event, there will be an additional 10% penalty on the money pulled out if one is under the age of 59 1/2.

A loan: is when one pulls money out of their retirement account and is required to pay back the loan within 5 years with interest . The interest is credited back to the retirement account it was pulled from . Per the IRS, as long as the loan is paid back within 5 years, there will be no taxes or penalties due on the money pulled out. You are able to take a loan of up to 50% of the account value or 50k, whichever number is less. Not all plans allow a loan to be taken from.