A 401K loan is no better than a 401K withdrawal when it comes to that scenario. Don't do it. We have discussed taking out loans against your 401K to pay off debt many times before. By taking out a loan means you risk being taxed twice on any funds you withdraw. If you should get laid off you are at risk of having to pay back the loan in a couple of months. With the current economic situation there is still potential for people losing their jobs. You could very well be one of them.
So if you decide to take out a 401K loan and should get laid off and can't pay it back fairly quickly you will run into a tax problem. The loan will then be treated as a withdrawal and you will be stuck paying the 10% early withdrawal penalty (if you are under 59 1/2) and will also have the money taxed as income.
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