Loans

• Your 401k plan administrator is not required to let you borrow money, but a majority of 401k plans do allow it. Acceptable reasons for a loan include medical expenses, tuition, buying a home or averting foreclosure. The IRS allows you to borrow up to 50 percent of your account balance, or $50,000, whichever is less, without a tax penalty. If you have an unpaid 401k loan from the previous 12 months, the plan will reduce the amount you can borrow by the amount of outstanding debt on the previous loan.
  
  

Details

• Interest rates on 401k loans are usually lower than personal loans, as you're borrowing from yourself. Another advantage is that instead of paying interest to the bank, the interest goes into your retirement account. Your retirement plan may charge you a fee for the loan, however. You must pay the loan back within five years -- unless you take it out to buy a house -- making regular payments on at least a quarterly schedule. If not, the IRS will treat it as a taxable withdrawal.
  
  

Drawbacks

• If you default on a 401k loan, you'll have to pay income tax on the amount you don't pay back. If you're younger than age 59 1/2, the IRS will also charge a 10 percent tax penalty on that amount. Even if you pay everything back, the money you've withdrawn won't be earning any interest for your retirement while it's sitting in your account instead of the 401k. Some plans won't allow you to contribute again until the loan is paid back, which means you also lose any matching contributions your employer would make in that period.
  
  

Hardship

• If your 401k plan does not allow you to take out a loan, ask whether you can take out a hardship withdrawal. The IRS allows you to withdraw from the plan before you turn 59 1/2 if you face a dire need, such as foreclosure, and you have no other way to cover the cost. If you withdraw money to prevent foreclosure, you will not have to pay back the withdrawal, or pay any interest, but you will pay income tax and a 10 percent penalty on the money you take out of the account. There are a few specific situations in which 401k withdrawals can be made before the age of 59 1/2 without incurring the 10 percent penalty, but avoiding foreclosure is not one of them.