An early dip into your 401(k)

NEW YORK (CNNMoney.com) -- You're in a crunch and need money now. But with the housing market in a slump, you no longer qualify for a home equity loan. What about tapping your 401(k)?

"Keep your hands off your retirement money," says Phillip Cook, a financial planner in Torrance, Calif. "It's rarely a good idea."

"We like to tell people that your 401(k) plan should be your absolute last resort," says Clare Bergquist, director of strategic services, corporate and retirement services at Charles Schwab. "It's a risk to your wealth because you're borrowing against your future."

Most major companies that offer 401(k) plans allow you to borrow against your account. But you'll end up paying yourself back - with interest to boot.

A withdrawal from your account is different than a loan, but both carry some type of fee or penalty. If you're under 59 1/2 and make an early withdrawal, you'll pay income tax on the amount taken out, plus a 10 percent penalty.

"If you withdraw money from your account and were in the 28 percent tax bracket, that 10 percent penalty will bump you up to the 38 percent tax bracket, so you'll end up paying more," says said Neil McCarthy, a Certified Financial Planner in Roswell, Ga.

Generally, you have five years to pay back the loan and up to 15 years if it's for the purchase of a first home.

You'll repay the loan through automatic deductions from your paycheck, including an interest rate charge, which is usually the prime rate plus one percentage point.

For example, you have $100,000 in your account and decide to take a $20,000 loan that you plan to pay back over the course of five years. The prime rate is 8.25, so the interest would be 9.25 percent. If you get paid bi-weekly, $256.07 would be deducted from your paycheck for 120 months.

And if you decided to stop contributing to your plan while paying back the loan, you can potentially miss out on even more. If it's a good year for the stock market, and there's a 15 percent rate of return on the $80,000 left in your account, you'll only be getting 9.25 percent on the $20,000 loan you took out.

"They are missing out on match money," Bergquist said. "It is such a risk to long term savings."

Not only do you repay the loan with after-tax money, but you will also get taxed again when you withdraw money in retirement. And you lose the compounded interest you would have received if you left the money alone.

"What you're doing is taking care of short-term pain, but this is going to impact you in the long term because the money is not growing at the rate that it could be growing," Cook said.

To make matters worse, if you were to lose your job before paying back the early withdrawal, then the loan becomes immediately due, typically within 30 - 90 days.

On rare occasions, you could avoid a penalty by proving certain qualified hardships, such as medical expenses. But not all hardships can escape a punishment, including housing payments or paying for education.

"You still suffer penalties. It's really a tough path to go down and should be avoided at all costs," Bergquist said.

"You should look for something else you can borrow from or something you can sell, like a car," McCarthy said. "If you're really down, I think you should go to some kind of service agency, like the Consumer Credit Counseling Service (CCCS)."

The CCCS and other non-profit service agencies help people reach financial stability by offering counseling on a range of issues including debt management, budgeting, financing education.

So stay away from your 401(k) - it's meant to be used while you're actually in retirement, not before.