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Dear Money101:



Should I take money out of our (my wife) 401K to pay off our house before the stock market falls or the dollar is worthless? We are both out of work; it's been 9 months and we are losing ground each month. The money in that fund would take care of our house payment. When we regain employment, we can start putting more money back [in it].

-Larry

Money101 readers: at this point in your life it may be hard to fathom retirement—however it is essential to start planning for it early.

A 401K retirement plan is usually offered by an employer and is designed to put post-tax and/or pre-tax money into a retirement fund. The employee decides what percentage of each paycheck goes into their customized plan. Some employers make matching payments – which is basically free money. The IRS does have limits on how much percentage of a person’s salary can be allotted to their 401K.

Plans vary, but the standard age in which an individual can take funds out of a 401K without paying penalties is 59 ½ years old. Penalties on early withdrawals could amount to as much as 40% of the balance, which of course is to discourage you from pre-maturely taking funds from your own nest egg.

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In terms of early withdrawal, Larry, you and your wife may qualify for what the IRS calls a “hardship distribution.” 

According to the IRS, an “immediate or heavy financial need” includes “certain medical expenses, costs relating to the purchase of a principal residence, tuition and related educational fees and expenses, payments necessary to prevent eviction from, or foreclosure on, a principal residence, burial or funeral expenses, and certain expenses for the repair of damage to the employee's principal residence.” You may only extract money out for these reasons if you have no other means of resources available. These stipulations obviously do not include the latest flat screen TV or anything of the like. Before taking money out, call the IRS hotline or consult your financial advisor.

Another option besides a hardship withdrawal is to “borrow” money from your 401K, which may be easier than going through the same process with a lender. The IRS allows you to borrow this money for 60 days, after which it must be re-deposited to avoid early withdrawal penalties. Rich White, author of "Twelve Steps to Your Personal Success in the 401(k) and Small Plan Market," points out that you won’t have to deal with a credit application, it will have no impact on your FICO score, and that there is no real out-of-pocket interest cost.

“In a 401K-plan loan, you are just accessing your own money for a time, and any ‘interest’ is repaid to your own account, so there is very little cost,” said White. “You just lose the opportunity cost of investment performance on the money you access.”

Taking money out of retirement is sort of like robbing yourself temporarily, so be smart about it; only consider borrowing from yourself in a severe situation.

“Borrowing from a 401K or making withdrawals from an IRA for anything other than retirement expenses should be a last resort,” said Paul Palazzo, managing director of Financial Planning at Altfest Personal Wealth Management. “If using the retirement assets makes sense, you can roll the 401K assets into an IRA and take distributions as necessary to pay the mortgage. If you are under 59 ½, you’ll have to pay a 10% penalty on the withdrawals (plus any taxes due), so it is wise not to take out any more than you have to.”

What may seem like a quick relief right now could mean real consequences for your future. If you stick your hand in the cookie jar too early, instead of living it up on a beach at 60, you may be stuck at a desk still doing the 9-to-5 routine.

“I’m frankly getting tired of telling people at retirement age that they don’t have nearly enough capital to retire,” said Frank Armstrong, author of "Save Your Retirement: What to Do If You Haven’t Saved Enough or If Your Investments Were Devastated by the Market Meltdown." “It’s a very painful discussion to have with people--most of them don’t have nearly enough. If you’ve got any alternatives at all, taking money out of your 401K is typically the worst of the alternatives towards your own long term financial independence.”

E-mail your questions to Money101@FOXBusiness.com, and let us take off some of the pressure.