Experts warn that taking money out of your 401(k) account while you're still working can cost you dearly later on.
Nancy and Charles Powell ignored that advice and borrowed money from his 401(k) plan. Years later, they're retired and have no regrets.
"We listened to a lot of people saying, 'Don't touch that,' " said Nancy Powell, 60, who lives in Bellingham, Wash. "But we borrowed out of it and we're retired and just fine."
Pamela Villarreal, a senior analyst at the National Center for Policy Analysis in Dallas, tells a different story. She and her husband borrowed from her 401(k) to make a down payment on their first home in 1993. She wishes they hadn't.
"We paid the loan back in about a year, but after we were done, we started looking at what we had lost by not having that money in the stock market," she said. "For us, it would have been smarter to have lived in an apartment for a couple of years and just saved for a down payment."
Financial advisors say the weak economy and credit crunch are likely to push more Americans to prematurely tap their retirement savings.
Statistics indicate that borrowing and so-called hardship distributions from retirement plans are creeping up, said Rob Reiskytl, senior consultant at Hewitt Associates in Chicago.
Either action can have significant long-term consequences, potentially costing the consumer hundreds of thousands of dollars over time.
But as the experiences of Powell and Villarreal illustrate, the consequences aren't the same for everyone.
Most experts agree that taking a distribution from a 401(k) -- withdrawing money and not paying it back -- is so costly that it makes sense only under the direst circumstances, such as when you need the cash immediately just to keep a roof over your head.
Even then, first weigh every other option, such as selling the car, the baseball cards and anything else that's marketable, said Brent Kessel, chief executive of Abacus Wealth Management and author of "It's Not About the Money."
And be aware that taxes and penalties can eat up more than 40% of your distribution, Reiskytl said.
The expert take on borrowing from a 401(k) is not so clear-cut. In some cases, it's a financial disaster. In others, it's a powerful financial management tool.
"There are no universal answers," said David Wray, president of the Profit Sharing/401(k) Council of America in Chicago. "But before you tap the plan, you want to make sure that you've thought it through. Small decisions made today can have enormous consequences."
