There is something important you need to know about your 401(k), 403(b) or other similar retirement account. You cannot have it both ways: You cannot enjoy the benefits of investing untaxed income and then have unrestricted access to those funds. The money you invest in that plan is for retirement. The government allows you to build your account quickly by investing pretax dollars. But there is a catch: You must give up unrestricted access to the money until you reach retirement age.

Unfortunately, most retirement plans have a provision that allows you to borrow from the account. However, these rules are so strict that borrowing shouldn't be an option. Even though borrowing from your account may look like an ideal way to clean up a big credit card mess or cover any other number of immediate needs, it has serious drawbacks.

If you raid your retirement account and then leave your employer for any reason before you repay it in full (chances are greater that you'll leave than that you'll stay, by the way), you'll have about 30 days to pay the entire balance outstanding. If you can't come up with the money, the loan may be considered a taxable distribution. That means you'll be hit with a 10 percent penalty and owe income taxes on the unpaid balance. In addition, the amount you can roll over to the next retirement plan also will be reduced significantly.

Here's a drawback few retirement-account borrowers ever consider: If you take a loan from your retirement plan, you will repay those pretax dollars with after-tax dollars.

And when you withdraw the funds at retirement, you'll have to pay taxes again on the same money. The government will not take into consideration that the loan repayment was taxed already. Double taxation is a severe penalty for borrowing from a retirement account.

Once you take money from your account, you stop growth momentum. If the stock market goes up before you repay the funds, you will miss out on gains. That could be significant if you take the full time allowed to repay; typically, it is five years.

When you borrow from your plan, you are, in effect, spending your retirement savings during your working years. But even worse, if repaying the loan becomes a heavy burden, you may be tempted to reduce or discontinue altogether your regular monthly contributions. Even the slightest disruption in your savings plan can put your future security at risk.

Here's my best advice: Don't think of your retirement account as a liquid asset. Rather, file it away in your mind as a frozen asset that is completely out of your reach but that you can watch develop and mature. In the meantime, devote your energies to reducing your expenses. Living below your means is the best way to eliminate the temptation to borrow from any source, but especially from a retirement account.

Mary Hunt is the founder of www.DebtProofLiving.com and author of 17 books, including "Debt-Proof Living." You can e-mail her at mary@everydaycheapskate.com, or write to Everyday Cheapskate, P.O. Box 2135, Paramount, CA 90723. To find out more about Mary Hunt and read her past columns, please visit the Creators Syndicate Web page at www.creators.com.
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