While many 401(k) balances have hit 10-year highs, many financial experts say they've also witnessed a surge in hardship withdrawals.

It's a move that should be the absolute last option, money managers say.

"You don't want to sabotage your retirement.  You will trigger taxes, and that is serious damage that is tough to repair," said Sharon Oberlander of Merrill Lynch.

Oberlander, who is rated among the top 100 female financial advisors, said pulling money out with a hardship withdrawal will automatically alert Uncle Sam, who will require a 10 percent penalty plus taxes on the "income."

One could wipe out 40 percent of their nest egg before they even see a penny of it.

With college costs soaring, Oberlander said she's also seeing too many parents mistakenly think of their 401(k) account as a back-up college fund.

"They're probably better off saying to their kids, 'Get the loans and I will help you make those payments,'" she explained.

Most college-bound young adults, she said, can get loans and part-time jobs.

Other options for emergency funds, as suggested by Oberlander:

• Liquidate anything of value.  Take another look at collections, such as stamps or artwork.  Sell expensive personal assets such as furs and boats.
   
• Borrow against life insurance.  If a policy has a cash value, you may be able to borrow against it at a low interest rate.
   
• Borrow against liquidated taxable securities.  It's tough if savings are dwindling, but if you have any investments outside your 401(k), go here first.  And with securities being the collateral, you can use a "loan management account."  They usually have fixed or variable interest rates, which keep costs down.
   
• Borrow from your 401(k).  It's not ideal, but at least when you pay back the interest you're paying it to yourself.  Consider, however, that you may have to meet certain criteria to qualify.
   
• Obtain an equity loan.  If you have equity in your home and the loan is tax deductible, then financially it may be cheaper than borrowing from your 401(k).
   
• Borrow from a friend or relative.  There has to be the confidence you will pay it back, but with bank interest rates so low you could offer save five percent interest on the loan.  You avoid the pitfalls and hefty price of a hardship withdrawal and they getter a bigger bang for their buck.

Oberlander maintains that almost anything is better than wiping out your retirement fund.

"That is your future," she said.  "If you have not provided for yourself for retirement, no one is going to give you a loan for that."

$mart Money: Navigating the Road to Financial Freedom

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