Is your 401(k) leaking money?

If you borrow money from your plan and don't pay it back quickly, it could be a costly gusher.

Millions took out loans from their retirement plans in recent years due to the recession. But if you haven't paid back your loans, you could be losing valuable funds that won't be compounding in your nest egg.

According to a recent study by the Pension Research Council at the Wharton School of the University of Pennsylvania, some 40 percent of Americans who have a 401(k) account borrow from their 401(k)s over a five-year period. While 90 percent of them pay back their loans, some 86 percent of those who had loans didn't pay them back when they either lost or changed jobs.

Although many employees have treated their 401(k)s like ATM machines in recent years, Uncle Sam will always ding you for taxes if your loan isn't repaid within 60 to 90 days of leaving a job. The U.S. Treasury makes $1 billion a year just on taxes on unpaid loans, which they consider "withdrawals" from 401(k)s.

How do you prevent leakage from your 401(k)? Here are some easy solutions:

* Rather than borrow, set up a federally insured savings or money-market fund for future needs. Keep the equivalent of at least three month's worth of expenses in it. While you won't be making much in interest, at least you won't have to take out a loan and pay it back. See for the best rates on savings vehicles.

* If your debts are overwhelming, talk to your creditors and get on a repayment schedule. Nearly every one of them will allow you to pay them a little each month. Try to avoid pushing debts onto high-rate credit cards. Consolidate where you can.

* Avoid the the temptation to take out multiple 401(k) loans. Unless you have plans -- and the money -- to pay them back immediately, you'd be better off considering other forms of borrowing such as life-insurance policy loans. This only works if you have a "whole-life" policy with equity built up in it. You can borrow money from it without needing to pay it back, although the value of your death benefit will be lower.
