How Not To Use Your 401k

It's not as easy to use your home equity for additional funds these days

, and it's becoming harder and harder to qualify for consumer loans. Where does the average American go for help? When it comes to getting extra cash to pay for education, buy new cars, and pay off credit card debts in these difficult times, many Americans are turning to 401K plans for temporary financial relief. At the end of June 2010, almost twenty-two percent of all employees enrolled in 401K plans had outstanding loans, up by more than two percent from 2008, says a survey by Fidelity Investments, with the average amount loaned staying virtually constant at $8,650 for this decade.

The misuse of 401K benefits has happened before, with approximately eighteen percent of all workers with active 401Ks having loans at the onset of the recession in 2001. In three years, the figure increased to around twenty percent. Fidelity's market insights head Beth McHugh explains this phenomenon as the result of necessity, with many people unable to cover their basic living expenses.

Financial experts generally consider loans from a 401K plan the last resort for the financially insolvent worker. Recommended alternatives to loaning from a 401K include withdrawing from emergency savings accounts, as well as taxable accounts to get additional cash, although the financial industry has focused more on long-term savings accounts for retirement (and the short-term account in short supply of funds). Exhaust all of your other options before you consider taking money from your retirement accounts and suffering heavy tax bills and penalties. If you must withdraw from one of your retirement accounts for quick money, do so from a Roth IRA if you have one. These retirement savings accounts have more relaxed rules when it comes to getting distributions before the account matures.

by: Carina Smith

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