Don't Tap Into Your 401(k)? Easy for Experts to Say

(MoneyWatch)  You know it's unwise to ransack your 401(k) or IRA funds even if you face a serious cash crunch, but you do it anyway. Shame on you! If only your sure-to-be-impoverished, 70-year-old self could come back in time and smack you silly to prevent such foolishness.

In the real world where people who lose jobs still need to cover mortgages, car payments and various insurance premiums, not to mention food and clothing for their families, the decision to tap 401(k) funds after an extended period of unemployment isn't a decision at all -- it's often a dire necessity.

A new, widely reported Hewitt Associates study found that 46% of 170,000 401(k) participants who left jobs last year cashed out their accounts. The results of the survey released yesterday drew predictable alarm from financial-service professionals, who warned of the grave, future consequences for the liquidators.

David Yeske, a certified financial planner and former president of the Financial Planning Association, doesn't admonish clients who broach the idea of tapping 401(k) or IRA assets to get through hard times. Rather, he advises them on the choices before them.

"We try to operate in a judgment-free zone," says Yeske, managing director of the San Francisco-based Yeske-Buie wealth-management firm. "Our role isn't to judge people, but to make them aware of the consequences of their choices and then make the decision that best meets their needs."

It may seem self-evident, but anyone facing financial hardship should first draw down non-retirement assets such as money in savings or money-market accounts, Yeske says. After that, if you still anticipate needing to draw off 401(k) funds, move your entire balance into a rollover IRA, he says.

IRAs allow for more hardship withdrawals free from a 10% penalty than company-sponsored 401(k)s, including paying for college tuition and health-insurance premiums following a job loss. And by rolling funds into an IRA rather than cashing out an entire 401(k) account and facing the full tax and penalty hit, unemployed IRA account holders can withdraw money on an as needed-basis and preserve as much of their retirement savings as possible until they find another job.

If you're facing hard choices such as these and don't have a financial planner, now would be a good time to hire one, at least on a one-time consulting basis. It could be money well spent - and keep your 70-year-old self from ringing your neck in your dreams.