Tax bills may be paid from a 401(k) through the loan provision if the plan allows for such loans, but the rules around 401(k) loans generally make it cost-prohibitive.
Advantages
401(k) loans may be advantageous due to the relatively easy access to plan balances. Borrowers generally do not need to explain to employers the reason for the loan and can be approved within a matter of days. Some plans also allow for hardship withdrawals, which do not need to be repaid, but the criteria for qualifying for such a withdrawal is higher than for a 401(k) loan. Borrowers normally do not need to go through any type of credit check when applying for a loan from their 401(k).
Disadvantages
Borrowing from a 401(k) plan has the potential for negatively impacting retirement planning. Money withdrawn from retirement plans forfeits the benefit of compounding returns and can potentially lose out on stock market gains during the period when the loan is outstanding. Loans from traditional 401(k) plans are subject to double taxation; loan repayments are made with after-tax dollars and are taxed again when withdrawn during retirement. In some cases, employers prohibit regular contributions until the loan is paid in full.
401(k) borrowers are generally given up to five years to fully repay the loan. If the employee leaves his job during that period, the full outstanding loan balance becomes due within 60 days. Any balance not repaid in time is then considered an early withdrawal, which is subject to taxation and a 10% early withdrawal penalty.