Dipping into Your Retirement Funds Is O.K.--Sometimes

Dipping into Your Retirement Funds Is O.K.--Sometimes

NEW YORK (MainStreet)—Raiding your 401(k) or IRA funds may seem like financial suicide, but in some cases it makes sense.

Some financial advisors consider it the ultimate act of financial insanity, but if you have already tapped out your emergency cash fund, borrowing from either retirement account can be a viable option.

Also see: How to Master a 401(k) and Roth IRA at the Same Time

The number of people borrowing from their 401(k) retirement accounts has increased recently, according to reports by Wells Fargo & Co. and Fidelity Investments, the largest provider of 401(k) plans.

Borrowing from your company-sponsored 401(k) plan is akin to taking out a short-term loan.

While you do not pay penalties or taxes on the income you receive from the loan, all of the loans require you to pay interest. In most cases, you are allowed to borrow half of your 401(k) balance or up to $50,000, said Andrew Valentine Pool, a portfolio manager for Regatta Research & Money Management, LLC, which is based in New Orleans.

The repayment period for the loan varies with each company, but it is generally five years or less, he said.

Also see: Your 401(k) is Invested in What?

"The majority of people borrow from their 401(k) for the wrong reasons," said Scott Sonnier, president and chief investment officer of Financial Management Services of America, based in Lafayette, La. "If there is a hardship or an emergency, then we allow for it. We don't want people accessing their money for vacation or a social function."

Most loans are paid back though payroll deductions, but many require the employee to pay an initial fee, plus interest, he said. Some loans also require an additional monthly fee.

Employers require their employees to pay the entire loan back within 30 or 60 days if they leave the position for any reason, said Pool.