For many people, the money accumulated in a 401(k) retirement savings account represents most - if not all - of their total savings.

So it's tempting to borrow from those funds when you need cash, whether to get through a short-term emergency or to help with a long-term goal like financing a child's college costs.

But experts say the drawbacks to dipping into your retirement funds often outweigh the benefits.

"I would never say 'Don't do it, ever,'" says John Nersesian, a financial planner with Nuveen Investments in Chicago. "It can be very helpful if done selectively, but destructive if done irresponsibly."

The main reason people tap their retirement accounts is that they're borrowing their own money and paying it back with interest that's usually set at a favorable rate, often close to the prime rate banks reserve for their best customers.

The thinking goes, "It's my money anyway, so I might as well borrow it and pay myself back rather than a bank."

And it's generally easy to get at retirement account money -- a phone call to the plan administrator or filling out a simple form.

According to the latest figures from Fidelity Investments, the nation's largest provider of retirement plans, some 20% of active retirement savers had loans in 2005. The average loan was $8,000, and it represented about 15% of the worker's total account balance.

Nersesian, who is managing director of Nuveen Investments' wealth management services, says not all plans allow loans. Those that do must abide by Internal Revenue Service rules limiting loans to 50% of the vested account balance or $50,000, whichever is less.

And while borrowing from a 401(k) is better than cashing it out, it is not without problems. The biggest occurs if the worker leaves his or her job before the loan is paid off, he said.

"If you can't pay it in full, it's treated as a distribution from the plan," he said. "Then it's subject to income tax as well as a penalty 10% if the worker is under 59 1/2."

Equally bad, Nersesian says, "you now have less money in your sheltered account ... to benefit from tax-deferred compounding." In other words, there will be less money available to fund retirement.

Catherine Williams, a credit expert with Money Management International, a Houston-based financial counseling and education agency, says there are many reasons not to tap your retirement funds.

"In many cases, your human resources department -- and often your immediate manger -- becomes aware of the loan, meaning that the people you work with are privy to your personal financial problems," she said.

In addition, if the money is borrowed for day-to-day expenses, such as paying down credit card bills, "then it's not there for a true emergency, such as a health emergency," Williams says.

Some retirement plans don't allow participants to make new contributions until their loans are paid off; some even withhold the "match" that employers give to workers who save.

"So another downside is that you cease being an investor - you're not building your account, you're not watching the market as well," Williams says. "It's a psychological change."

Williams suggests that before workers tap their 401(k) accounts they look at alternatives:

• Are there other assets you could liquidate, like a piano you don't use?
• Are there any other investments you could liquidate, such as a certificate of deposit?>/li>

• Have you considered refinancing your home or taking out a home equity loan or line of credit?
• Could you work a second job to raise the money you need?

"The last thing you want is trading a secure future for discretionary spending," Williams says.

By The Associated Press

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