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The biggest danger with a 401(k) loan is the possibility of defaulting on the loan and having to pay the taxes and penalty on the withdrawal.

No, actually the biggest danger isn't defaulting. The biggest danger is getting called to an impromptu department meeting in the cafeteria, where the boss reads from a piece of paper that is being read to all the other departments at the exact same time. The paper that starts out with, "Unfortunately, due to business conditions .... you are all laid off."

That's when you have 30 days to completely pay back the entire 401k loan balance. Or else, as you said, having it treated as a withdrawal and having to pay the taxes and penalty. Moreover, if you don't you can never put that money back into a 401K or IRA.
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