Suze Orman says everyone should invest in a 401(k) - but never use it for this

"Now, let's say you lose your job before the money plus interest is paid back. You still have to pay back whatever the remaining balance is on that loan. And if you don't have the money to pay it back, it will be taxed to you as ordinary income. That's in addition to the 10% penalty if you were under the typical retirement age of 59 1/2."

"make sure you've explored other options that could meet your needs," says Kai Walker, managing director, of Retirement Research and Inclusion Transformation at Bank of America, as quoted by Merrill Lynch. Instead, if you need money, you can always take out a home equity loan or even a personal loan. But before you even do that, consult with your financial advisor first."

Taking a loan from a traditional 401(k) forces after-tax repayments into a pre-tax account, causing those repayments to be taxed again upon withdrawal and effectively producing double taxation. Loan repayments also incur interest that is paid with after-tax income, reducing net benefit and creating opportunity cost by removing funds from potential market growth. If employment ends before full repayment, the outstanding loan balance becomes taxable as ordinary income and may incur an additional 10% early-withdrawal penalty if under age 59½. Alternatives include home equity or personal loans, and consulting a financial advisor before borrowing is recommended.

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