Even though most financial advisors will tell you that taking a withdrawal, and many times even a loan, from your retirement account, should only be a last resort if you’re in a financial pinch, many people lately have been taking early withdrawals (with penalties and taxed as income), and loans against their 401k retirement accounts to help them through difficult economic times.
Although I must admit that I did take a loan against mine about 6 years ago for a financial hardship, I can honestly say that I will never, if I can help it, take that loan again. Even with me paying myself interest when I paid the loan back, directly out of my paycheck, I still missed out on precious compounding interest on my stocks because my balance was lower and the money I had withdrawn was not earning interest during the time.
Although when you take a loan, versus a withdrawal, there are no tax consequences, you are still taking money out that could be earning interest and is not, until you fully pay off the loan, and this can definitely impact your bottom line when you finally retire.
Many people are citing difficulty in paying their mortgages and credit card and other debt as reasons for taking withdrawals and loans, however, financial planners say that it still should be used as an absolute last resort, because who knows when you’ll get around to paying it back.
Also cited as reasons for the increase in borrowing against 401k’s is the whole credit crisis, as well as credit card companies lowering charge limits, when many people rely on credit cards (not good) to pay monthly expenses in one way or another. Also, it is increasingly harder to get low APR credit cards, so people are more heavily relying on lump sum money and other sources of income.