IT’S NOT UNCOMMON TO FIND YOURSELF requiring cash quickly — a major home repair crops up, say, or there’s a promising business opportunity you need to act on right away. If you’re working, taking money out of your employer-sponsored 401(k) plan account, either through a loan or an outright withdrawal, could look like the easiest solution. “When you have to come up with cash for a pressing need, your 401(k) plan may be a tempting source of funds,” says Kai Walker, head of Workplace Benefits Research and Inclusion Transformation at Bank of America.

But before you take that step, it’s wise to understand your options — and understand why a loan or withdrawal could exact a cost over the long run. That’s why it makes sense to speak with your financial advisor and tax professional first. They can take your personal situation into account and work with you to determine the strategy that suits you best, including identifying alternative sources of funding to also consider.

2 ways to tap your retirement account early

You have two main avenues for taking money out of your employer-sponsored 401(k) plan account. Keep in mind that the provisions may vary from company to company — the government sets rules for what plans can do, and then your employer decides which options to offer in its specific plan.

401(k) loan: Your 401(k) plan may allow you to borrow against your retirement account (though it isn’t required to). While loan terms vary, typically  the amount you can borrow is based on your account’s value, maxing out at $50,000. You must repay the loan with interest, generally within five years. On the plus side, your repayments replenish your account — you’re essentially paying yourself back.

Early withdrawal: If you haven’t yet retired, your 401(k) plan may let you dip into your funds by taking a withdrawal (also called a distribution). You could owe federal and state income taxes on the withdrawn amount, plus an additional 10% federal income tax if you are under age 59½, unless an exception applies.¹ See the box below for specifics.

If you’re eligible for a distribution option that isn’t available under your employer’s plan, you may still be able to qualify for an exception to the 10% additional tax. Your tax professional can fill you in on the rules and limitations. Also bear in mind that some of the dollar limitations above are subject to future adjustment to reflect inflation. And while you may still owe ordinary income taxes on these early withdrawals, some of these distribution options permit you to spread the taxable income over multiple years or repay the distribution to an eligible retirement plan or an IRA and get a refund for the taxes you’ve already paid. Consult your tax professional for guidance.

3 reasons to think twice before taking money out of your 401(k) pre-retirement

1. You could face a high tax bill on early withdrawals

If no exception applies, the taxes on an early withdrawal can add up. Let’s say your account consists entirely of tax-deferred funds. In that case, taking a $10,000 early distribution results in a $1,000 (10%) early withdrawal tax. Meanwhile, the $10,000 is considered taxable income and is subject to state and federal income taxes based on your tax bracket. As a result, in many circumstances an early withdrawal nets you only a fraction of the spending power of the money you take from your retirement savings.

2. You’re losing an opportunity to potentially grow your savings and investments

By taking a withdrawal or borrowing from your retirement account, there are two ways you can interrupt the possibility of your funds growing – not only are you removing money that’s potentially growing through tax-deferred compounding, but you’re also giving your account less time to recover from the reduction. That could hurt your efforts to reach your retirement goals, notes Walker. “As a general rule, dipping into your retirement funds to cover a short-term need could end up costing you more in the long run,” he says. The example below shows how the costs of withdrawing funds early can be steep when you consider the missed opportunities.

3. You can be on the hook for a 401(k) loan if you leave your job

One advantage of a 401(k) loan over a withdrawal is that you don’t pay ordinary income taxes or potentially face additional taxes on the amount you borrow if you repay the loan in accordance with plan terms. However, if you leave or lose your job before you’ve repaid the loan, you may have to pay back what you owe, and quickly. If you can’t, the unpaid balance is considered a distribution (referred to as the loan offset amount), and the tax rules for early withdrawals apply: You may be subject to federal and state income taxes, as well as an additional 10% federal income tax if you are under age 59½, unless an exception applies.

If you are able to come up with cash, even if it’s not right away, you may avoid taxes by repaying the loan or rolling over an amount  equal to the loan offset amount to a new employer’s 401(k) plan (if permitted by the plan) or to an IRA — as long as this is done by the federal income tax filing deadline, including extensions, for the year in which the offset occurred.

Alternatives to tapping your 401(k) early

“Before you consider taking a loan or a withdrawal from your 401(k), which may be your only retirement savings, make sure you’ve explored other options that could meet your needs and be more beneficial to your long- and short-term financial goals,” Walker advises. Discuss the pros and cons of other borrowing options such as these Bank of America loan options, with your advisor:

Also, consider building a sufficient emergency fund so that you can avoid the need to borrow money for short-term needs. Set aside these funds in a separate account so that the money’s available if and when you need it. (For more on protecting your finances from unexpected events, see “Preparing for the big ‘what-ifs’ in your financial life.”)

Remember, tapping your retirement nest egg during your working years could have a significant impact on your future financial security. As Walker says, “Your retirement savings should be your last resort for borrowing.”