Net Gains: Why You Shouldn't Take a 401(k) Loan

After-tax payments: Borrowing from a 401(k) strips away its tax advantages. Each dollar you remove had been contributed on a pretax basis, meaning you did not pay an income tax on that dollar when you first received it from your employer.

But when it comes to paying back the 401(k) loan, you are using dollars already taxed by the government. To pay back one dollar borrowed, you many need to earn $1.18 or more, depending on your tax bracket and what state you live in.

Lower contributions: Those carrying the burden of 401(k) loan repayments are likely to make lower contributions to retirement savings than they otherwise would. Even if they do not lower what they had been contributing, increased contributions are less likely.

The greatest danger may be inability to repay the loan. If you lose your job or change jobs voluntarily, the employer may require immediate repayment on the outstanding loan balance. If you default on the loan, you will be hit with the 10 percent penalty and ordinary income tax mentioned above.

For these reasons and the sake of your future retirement, consider a 401(k) loan only as an absolute last resort, not as a quick fix to short-term cash crunch. Don't make the same mistake I did.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

David McPherson is founder and principal of Four Ponds Financial Planning (www.fourpondsfinancial.com) in Falmouth, Mass. He previously worked as a financial writer and editor for The Providence Journal in Rhode Island. He is a member of the Garrett Planning Network, whose members provide financial advice to clients on an hourly, as-needed basis. Contact McPherson at david@fourpondsfinancial.com