NEW YORK (CNN/Money) - Are there any disadvantages to borrowing against my 401(k)? The rate seems rather attractive compared to other higher interest alternatives available to me.

-- Timothy Jenkins, Chesapeake, Virginia

You're absolutely correct that the rate on 401(k) loans is usually very competitive compared with those on other loans. Although there are no regulations that dictate what 401(k) plans can charge for loans, federal rules do require plans to charge a "reasonable" interest rate.

Most plans interpret that as a rate one or two percentage points above the prime lending rate commercial banks charge. With prime at 4.25 percent, that would mean a rate of 5.25 percent to 6.25 percent. Some plans also add a processing fee of $50 to $100, and some may also charge quarterly or annual fees to keep track of the loan.

In addition to the relatively attractive rate, companies usually make it fairly easy to repay the loan, deducting the payments from your paycheck, and putting the money right back into your account.

There are some restrictions on how much you can borrow and on the length of time you have to repay the loan, although they're not too onerous. The loan can't be larger than $50,000 or half the balance of your account, whichever is smaller. And it must be repaid within five years, although plans usually give you 10 to 30 years if the loan is used to purchase a home.

As attractive as the rate and terms may be, however, there are some drawbacks to borrowing from your 401(k). For one thing, you'll be using after-tax dollars to make the interest payments on your 401(k) loan. Those dollars will then be taxed again when you later withdraw them from your account during retirement.

RELATED ARTICLES • Shake, rattle and rollover • 401(k)s: Borrowing from yourself • The price of paying back my 401(k)

So you end up paying taxes twice on the money you use to repay the loan, which drives up the effective cost of borrowing from your 401(k). (You're also using after-tax dollars to make principal payments, but in that case you'll have gotten the use of the loan proceeds, which hadn't been taxed, so it's a wash.)

Consider too that many borrowers find it difficult to repay the loan and continue to make new contributions to their plan. If that becomes a problem for you and you suspend contributions, you could easily end up accumulating less for retirement than you otherwise would have.

Finally, you should also know that if you leave your job or are fired from your position, most employers will require that you repay any remaining loan balance in full before you depart or shortly thereafter, usually within 60 days. Fail to do that, and the outstanding balance will be considered a distribution that is subject to income tax and, possibly, a 10 percent penalty.

Bottom line: I think you're generally better off keeping your hands off your 401(k) balance if at all possible. The main reason for having a 401(k) is to accumulate money for retirement, not to have a source of funds you can tap whenever you need extra cash.

If you really must borrow, I suggest you check out a home equity line of credit instead. You can find many banks willing to make home equity lines at the prime rate or even less, plus the interest on home equity loans is generally deductible, which isn't the case with the interest you pay on your 401(k) loan. (To check out the best rates on home equity lines, check out the Rate Search section of our Web site.)

And, whatever you do, try to keep those contributions flowing into your 401(k). In today's brave new world of retirement planning, the undeniable reality is that the less you stash away today, the less you'll have for retirement tomorrow.

Walter Updegrave is a senior editor at Money Magazine and is the author of "Investing for the Financially Challenged."