TAMPA, Fla. — Chris Clark and Jim Heffner are making plans in their dream home.
It's a place they might not have been able to buy without an emergency loan from Clark's 401K retirement plan.
"Borrowing against the 401K seemed to be best option that we had," Clark said.
Clark and Heffner moved from Arizona. Their money was tied up in property there.
The loan allowed them to buy a home in Florida without selling the Arizona house right away.
Heffner, who is a realtor, said he sees his clients do it as well.
"We personally didn't feel like it was a real risk in doing it," Heffner said.
Sometimes it's ok
Financial adviser Eric Klaus said despite the myths, sometimes it's OK for people to consider dipping into their 401K savings.
"You can only take 50 percent of your vested balance, or $50,000," said Klaus, President and owner of Klaus Financial Group. "It's a great opportunity for the right situation."
An example might be paying your child's college tuition in May when you're expecting a big bonus in December.
"You can probably get, very easily, some cash out of your 401K, pay that tuition rather than going to a bank or getting a loan or putting it on a credit card, pay yourself the interest," said Klaus. "Five, six, seven months when you get your bonus at the end of the year, you pay your loan back."
Pitfalls and penalties
But Klaus warned there can be serious pitfalls too for those who aren't careful.
"When you take that money out, it's no longer invested," Klaus said.
In addition, there are penalties attached for those who don't pay their loans back.
"If you're under 59 1/2, they charge you a 10 percent premature withdrawal penalty and it gets treated as current income, so you could get taxed," Klaus said.
Also, those who lose or change jobs will likely have to pay their loans back sooner than planned.
"Know the pitfalls and what the potential benefits are and then you weigh the trade offs," Klaus said. "'Does this make sense for me?'"
Financial experts warn it does not make sense to borrow from a 401K loan for frivolous purchases like a big screen TV or a fancy car.
"Next thing you know you're stealing from tomorrow to pay for a lifestyle of today," Klaus explained. "What happens, you may not notice it now, but when you get down the road, you can't retire when you want, and you look back and say, 'I didn't have to do this, but I was frivolous with my money,'" Klaus said.