Many who have lost their jobs are now looking for ways to pay off debt so that they can live within an extremely tight budget. Who can blame them? The feeling is that "it is my money, so I am going to use it in the best manner to help my family and stay afloat financially."

If you choose this path, then pay attention to these possible pitfalls.

Defers unemployment. If the government gets wind of you taking your 401k money out and then filing for unemployment benefits, then you will have to wait for the unemployment benefits to kick in. This is because they consider the 401k money as income and you will not be eligible for unemployment until it 'runs out.' It is not pretty, but that is the fact. If you are caught doing this, then you could be required to pay back the money that you obtained from unemployment benefits for that term.

Makes you pay taxes and a penalty. Your 401k funds are taxable when you begin to take them out (unless you are 59 years old). Also, there is a 10% penalty for taking the money out before you reach retirement age. Make sure that you take the tax money out of the amount of your 401k and pay it right away, because there is little that is more depressing that owing the government for back taxes. And, they will get their money. One way or the other, you will pay that money back through the various means that they have at their disposal to seize your money as you make it.

Leaves you with no retirement. If you do this, you will have no money left in your retirement account with which you can retire. This means that you will likely have to work beyond retirement age. Adding more fuel to this fire is that if you have a serious health problem, you will have nothing to which you can fall back on to help pay off those incredibly high bills. Having massive medical bills and not being able to pay them will land you in court in order to garnish any wages that you may make in the future.

Forces you to start over. There is nothing as deflating as having to start over from scratch with your retirement account. When you were young it was easy to begin to put money away for that day, in the distant future, when you could retire with a modest income to get you by. Once that money is gone, it will take years to replace it. If you are already near retirement age, there will be no way that you can make it up soon enough to retire.

Using your 401k money makes little sense financially. If you feel like you cannot afford to move ahead without it, seek out the advice of a financial counselor who might be able to find a way for you to work through temporary difficulties without having to use your hard-earned money on a whim.

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