Record numbers of foreclosures, rising gas and food costs, and just overall tough times have seen many people dipping into their 401(k)s to make ends meet. Although it may seem like the place to go when you’re facing serious hardship, there are some things to consider before you raid your retirement accounts.

The disadvantages of taking a hardship withdrawal:

  • Taxes. If you are under 59 1/2, you will have to pay income taxes on the money you take out. You will also have to pay a 10 percent early withdrawal fee.
  • Interest. If you take money out of your 401(k) early, you won’t be able to take advantage of the compound interest on that money. Taking out a small amount now can mean forfeiting huge amounts when you are ready to retire.
  • Future Deposits. Most employers will not allow you to make fresh 401k contributions for six months after taking the withdrawal. This further limits your ability to build a retirement nest egg.

You should see if your plan offers a 401k loan as an alternative to taking a financial hardship withdrawal. Plan loans are not subject to taxes or penalties, and you can continue to contribute to the plan while you repay the loan. If you end up leaving your employer before the loan is repaid, you have to pay back the remaining balance otherwise it will be considered a withdrawal and subject to taxes and penalties.