Raiding Your 401(k)


Raiding Your 401(k)

In a financial pinch? It's easier than ever to remove money -- but it's still a bad idea.

Like struggling financial institutions that have turned to the Federal Reserve, workers are looking to their 401(k)s as lenders of last resort. A recent survey from the Transamerica Center for Retirement Studies found that 18% of workers took out loans last year, up from 11% in 2006.

Eyeing the 401(k) piggy bank is understandable; lenders are stingier, the economy is shakier, and the value of homes and portfolios has shrunk. Little wonder that money-management firm Reserve Solutions stepped up promotion of its ReservePlus debit card this year. If your employer offers it, you can tap your retirement savings at the mall or at an ATM.

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But unless your straits are truly dire, or your need is both short-term and finite -- say, you're using the money to pay for a one-time medical procedure and not because your mortgage reset -- leave the money in the account, where compound returns work magic.

Let's say a 35-year-old, who has been contributing $264 a month and has a $30,000 balance, takes out a $10,000 loan at current rates for five years (assume contributions stop for the life of the loan, as usually occurs). The borrower will forgo $145,000, or 20%, at retirement age -- even though the loan plus interest is plowed back into the 401(k), according to calculations by T. Rowe Price.