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Temptation to Tap 401(k) Fuels Debate

In a tough economy, when cash-strapped individuals are looking for a ready source of funds, retirement plans figure as a tempting pot of money.

Admit it: You probably wondered whether now's a good time to tap your retirement cash, especially with investment returns sluggish for so long.

So far, most people have resisted the temptation to withdraw from their accounts, take loans or even mess with their portfolios.

In a recent study, researcher Hewitt Associates found that most 401(k) participants didn't change their behavior much in 2008.

Just 20 percent did any trading in their accounts, while 23 percent took out a loan and a mere 1 percent pulled out money permanently as hardship withdrawals, figures comparable to prior years.

But that's not a universal view, with some people eyeing the accounts as an accessible source of cash.

Joe Pinkley quit his job as a district-sales manager for a major bakery this year to pursue his dream of starting a restaurant. He funded it by cashing out his 401(k) account, to the tune of roughly $20,000.

Why close his only retirement account?

"That's where the money was," he said.

Pinkley, 52, realizes he will pay a price for that decision: Income taxes apply on 401(k) withdrawals, plus a 10 percent tax penalty on distributions taken before age 59 1/2. But he'll ease the tax bite with some business deductions for which he now qualifies.

Employers offering 401(k) plans aim to discourage workers from loans or withdrawals. Aside from the tax bite on withdrawals, pulling out money whittles the account. For some people, 401(k) plans are their biggest source of savings.

Short of making a permanent withdrawal, taking out a 401(k) loan offers a compromise. Workers can access part of their funds without the need to qualify for a loan, as they would with other forms of borrowing. They pay back the money gradually by having it withheld from salary, and face modest interest rates, often in the 4 percent to 6 percent range. Principal and interest go back into their account, rather than to a bank.

If you're pondering a loan or outright withdrawal, make sure you understand the costs and other pitfalls.

"This isn't the first time I've taken chances," Pinkley said of his decision to close his 401(k) account. "But it was the only way I was going to be able to get into the restaurant."

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