Last resort

Imagine for a moment that you're the typical American middle-class consumer, feeling the ill effects from gorging on too much of Big Al's EZ Credit for too long.  You're strapped with debt.  You can't tap the equity in your home because you've already maxed that out and your home is no longer rising in value (or even falling in value).  So you turned to your credit cards, since you continued to get generous offers — new cards offering 0% for a limited time, existing cards offering to raise your limit.  Only now you've maxed those out, too.  And you still can't make ends meet.  So where do you turn?

Ah ha

Despite potential tax and investment consequences, more individuals have been borrowing from their 401(k) plans or taking hardship withdrawals in recent months, some retirement-plan providers say.

Not all plans have seen jumps, and more-comprehensive statistics won't be available until next year. But a number of plan providers that follow month-to-month patterns, including T. Rowe Price Group Inc., Hewitt Associates and Hartford Financial Services Group Inc., have seen a small but noticeable uptick.

The scariest thing to come out of this article is that 20% of 401(k) holders already have loans out right now.  But the most maddening thing is the history on the way many of these loans have been used.

"A few years ago, the buzz was about borrowing from a 401(k) to buy a second home," says Jeff Carbone, a financial adviser in Cornelius, N.C. "Now it's people looking at their 401(k) because they've extended themselves on their homes and credit lines."

Put another way: Some of the folks who tapped their 401(k) to buy a "vacation home" or "investment property" are now tapping their 401(k) again because they can't afford to own that "vacation home" or "investment property."

You know, I try to keep at least some of the milk of human kindness flowing through my vessels.  Subprime borrowers who didn't know what they were getting into with teaser rates?  Yeah, I can sympathize a bit; they should have been more aware of what they were getting into, but it was the Fed's creation of loose money and cheap credit that made it possible.  And while the Fed is equally to blame in the case of the above-mentioned 401(k) borrowers, I have zero sympathy for them.  If they have enough money coming in to save for retirement, and they're savvy enough with their finances to stick some of it away tax-deferred vehicle, and then they turn around and take those savings and get in too deep by speculating in real estate… well, they deserve whatever's coming to them… and that includes the double tax hit:

Even a person who pays such a loan back on time, and therefore avoids the 10% penalty, is getting taxed twice, says Bill Arnone, a partner at Ernst & Young LLP — once when repaying the loan with after-tax dollars, and a second time when the money is withdrawn at retirement.

To say nothing of the appreciation that's not occurring while the money's not in the account.  These people deserve every penalty that's coming to them.