One's 401K plan is the LAST place I would ever recommend taking money out of to pay short term debt or expenses. The reason being is simple, you put that money in tax free, and it is working for you tax free to be there when you need it in retirement. We all know how powerful compound interest is (If you don't, read my article about it), and just a few years of not having that money grow tax free can make a huge negative difference at retirement. So, if you can get the money from just about anywhere else short of a 40% interest rate credit card cash advance, you should look elsewhere first.

First of all, if you take a straight withdrawal from your 401K, you will get a 10% penalty right off the top AND have to pay taxes on the amount withdrawn. Think of that, 10% of your money is gone before you even touch it, and you think credit card companies are bad? You can avoid the 10 % penalty if you fall in to selected categories, such as if you are totally disabled, loose a job at 55 or older, have a court order for child support or alimony for the amount, or have medical expenses that are more than 7.5 % of your adjusted gross income.

Even if you don't mind the 10% penalty, you still have to have a reason to withdraw the money such as the purchase of your primary home, medical expenses for you or your family, payment of college tuition and educational costs such as room and board and books for the next 12 months for you, your spouse, dependents, or children who are no longer dependents, funeral costs, expenses to prevent eviction from your home or expenses to repair damage to your home. Even if you are dead set on taking a withdrawal, an employer doesn't have to give you one. So, best off just putting this idea in the dustbin and looking at a loan.

Loans from 401K's are still not a great idea for the same reason, the money won't be in the account to grow. But it is still better than a withdrawal if all else fails. You can borrow up to half you balance right away in one lump up to $50,000. You will have to pay it back over 5 years generally, but if you can't even pay your bills now, how likely do you think repayment will be? Another reason I think this is a bad idea. That said, you do pay yourself back, so if there are no other options, at least you will only owe yourself. You pay back the principle plus interest at prime plus 1%, which you pay to yourself. Be careful the amount though, because most employers deduct your repayment directly from your check, so your checks could be severely diminished over the next 5 years.

There is another huge problem to be concerned about. With few people keeping jobs for any length of time, if you loose your job that your 401K loan was with, you will have to pay back the WHOLE loan in 60 days. If you needed the money so bad in the first place, the likelihood of paying back a huge loan in a couple months is pretty much nill. Then, you will be back to the 10% penalty and taxes like a withdrawal. And again, you employer doesn't even have to offer you the loan, and can even decide which expenses they will let you take it out for and which not. So, sounding like a broken record, better to look elsewhere.

Well then, where can I get my hands on some quick cash to make a down-payment on a house? You can always read my articles about making more money, or there are a couple other little tricks I suggest. You can always stop putting money in your 401K for a short period. If you were contributing say 10%, reducing that to 0 for just a short time will increase your check substantially. One problem is that usually people need money right away, and a little extra in your check every week usually won't help that situation.

Better to look to your Roth IRA for immediate cash. You can always take out your initial investment without penalty if you need the cash right away and you don't have to pay it back. It would be a pretty desperate move, considering there goes your retirement money that is working tax free, but desperate times as they say. What I would do is check with friends, family, community services, any place I could get a quick infusion of cash to pay a short term bill. You can also look to sell unused or unneeded goods that you have, or even pawn them. I have seen people pawn their family heirlooms and never go back to get them. It just goes to show you when times are tight, cash is better than possessions.

We all need money fast at one time or another. It sometimes seems like there is this big pot of 401K money over there that we are never going to use and it is so tempting just to dip into it to cover the need. Trust me though, someday you WILL use that money and be glad you have it, so look at every other avenue before deciding to take money out of your 401K.