Mike Brown

When over-extended Americans need quick cash, some are raiding their 401(k) retirement stash for money to pay down debt, but Chattanooga investment advisers warn against it.

“You can’t look at your 401(k) as a checkbook. If you do then you are making a terrible mistake,” said Mike Brown, senior vice president of Morgan Keegan in Chattanooga.

Mr. Brown said all 401(k) plans are not the same, but the Internal Revenue Service imposes a 10 percent additional tax to anyone under the age of 59 1/2 who decides to take an early distribution from their employee contribution plan.

Some plans do not even allow for borrowing or early distributions, he said.

“When I prepare or set up a 401(k) plan for a business, I encourage the business owners to not allow borrowing capabilities because it is not in the best interest of the employee,” he said. “Your 401(k) money is retirement money for yourself. It should be looked upon as sacred ground because if you fail to pay it back the consequences are severe.”

Just like with any debt, taking a loan from a 401(k) depends on the individual’s financial situation, said Warren Barnett, president of Chattanooga investment firm Barnett & Co. It all hinges on whether they can pay the money back or not, he said.

“The misperception people have is that they are borrowing from themselves, and that’s where they fall into a hole,” Mr. Barnett said.

He said more people may consider withdrawing money from their 401(k) plans in the future because some boomers think they will inherit money. But, Mr. Barnett said, their parents will probably spend the money as fast as they are and consequently inheritances may not be as big as people expect.

“This is especially true in cases where, in typical fashion, the parents got most of their wealth through the appreciation of their house, and the forecast for housing is not terribly promising in terms of investment returns,” he said.

If boomers or others with debt decide to go ahead and borrow from their 401(k) and cannot pay the money back or do not repay it in a timely manner, then it is considered a distribution and they can be faced with penalties, Mr. Barnett said.

“It’s not quite the piggy bank it’s perceived to be,” he said. “In addition, not only are they out the additional taxes they have to pay, but they are also out any future earnings the money could have generated.”

If an individual considers taking a loan from a 401(k) plan, Mr. Brown and Mr. Barnett both recommend only doing it as a last resort.

But before they get to that point, Mr. Barnett said individuals should evaluate their lifestyles and see what can be cut out.

The essence of the situation is that living within your means is the cheap way to be rich, he said.

“I think you basically have to question every premise of your lifestyle,” he said.

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