As the threat of foreclosure continues to mount for many homeowners, the temptation to borrow against a 401(k) increases. Very bad idea, yet one that occurred to 13-19% more 401(k) holders in 2007. A recent article in CFO Magazine details a few of the ugly scenarios that can result.

Yes, many companies offer loan programs as part of their 401(k) programs as an incentive to get employees to participate. Employee loans against 401(k) balances are bad for both employers and employees. Not only is it a huge administrative headache for employers, but employees often get caught if their are any discrepancies or inaccuracies in the amortization schedule for repayment. Like the IRS will care that someone in the HR department made a mistake. The employee is solely responsible for any and all payback irregularities.

One of the advantages of participating in a 401(k) program is to take advantage of the free money from matching employer contributions as well as compound interest on contributions. Neither of these advantages occur when an employee stops making new contributions and merely repays the borrowed amount. Problems mount exponentially if an employee loses his or her job while owing money against the 401(k) balance. Just when the employee is most at financial risk, the outstanding amount must be repaid in full or the IRS will consider the loan or withdrawal as ordinary income and tax it accordingly. There is a 10% penalty if the borrower is under age 59 1/2.

The IRS does allow for hardship withdrawals from a 401(k) to avoid foreclosure of a primary residence, but the long term savings consequences are staggering. A 5 year, $8,200 loan can have a $62,000 impact on the 401(k) bottom line. Cutting expenses, renegotiating with creditors, getting a second job, are just a few of the much better alternatives for financially strapped homeowners.

In case you haven't watched anything other than HGTV for the past few days, the once-proud investment banking giant Bear Stearns has collapsed, going from $150 a share to $6 in less than a year.

Of course, top executives will be fine. But today's Wall Street Journal reports (subscription required) that the deal for the firm to be acquired by JPMorgan Chase for $2 per share will cost many employees their jobs -- and their retirement savings. Bear Stearns employees own about one-third of the company, and have seen their shares lose more than 90% of their value.

Of course my heart goes out to the Bear Stearns employees, but this is getting to be a familiar tale: company goes bust and workers are hit with a double whammy: no more job, worthless 401(k). Remember the video of the Enron human resources representative telling employees they should put their entire 401(k) in Enron stock?

Here's how I look at it: As an employee, your future is already bound tightly enough to the future of your company. If the company prospers, your job will be secure, you'll be in line for raises/promotions, and your resume will be improved by the recognition of your employer's great success.

With your retirement money, you should be looking to diversify away from your exposure to the company -- Since your job is probably your biggest supplier of wealth, you don't need to own a large amount of stock in the company too.

Reserve Solutions is marketing a new kind of debit card - one that lets you stop at the ATM and withdraw money from your 401(k). The withdrawals are treated as loans against your retirement account, and you must repay the funds to the plan with interest. Of course, it's being marketed as a convenient way to access your money in a time of need.

But this is the most horrible idea ever. 401(k) funds are meant to be saved for retirement, not frittered away when you're a little low on cash. This card is a disaster waiting to happen... with consumers having immediate access to funds... possibly without thinking it all the way through.

Even though the funds withdrawn will initially be treated as a loan, that loan can quickly turn into a "distribution" if the employee defaults on the loan or leaves the employer (and therefore the plan). And taking a distribution from your 401(k) before you're retirement age can have dire tax consequences. In addition to regular income taxes that may be owed on the withdrawal, there are federal and state penalties that often apply. People typically end up losing about 50% of their money to the taxes and penalties.

If you need money and you have a 401(k), the first step is to stop contributing to that plan and use the money that would have gone into the plan for your current needs. The next step is to find cash anywhere but the retirement plan. Withdrawing from the 401(k) should be an absolute last resort, and should only be done in the direst of circumstances.

Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.

I hate to be the bearer of bad news, but there is no Santa Claus, Tooth Fairy, or Easter Bunny, and it's impossible to "recession-proof" your 401(k), because no sector is immune from an economic slowdown. You can, however, take some reasonable precautions to limit the damage.

For one thing, stay the course. Unless you are in dire financial straits, don't cut back or quit contributing to your retirement fund. The stock market is your friend over the long term, though over the past few months it hasn't been much of one. Make sure that you are well-diversified and don't be afraid to get out of funds that aren't performing well and seem to have little chance of recovery. Furthermore, avoid the temptation of doing anything rash like liquidating your 401(k) because of worries about the market, since the tax consequences are severe.

Figuring out why a fund is performing poorly isn't difficult given the huge amount of financial information on the web. Remember, historically some sectors in the stock market such as health care and consumer staples such as Coca-Cola do well when the economy slumps. IBM and other companies with large overseas business also are being helped by the weak dollar. There are losers, such as financial and industrial stocks. Even tech companies, including Google, are in Wall Street's dog house. No company, though, will escape the recession unscathed, and anyone who thinks otherwise is kidding themselves

The stock market's wild gyrations over the past few months have frightened even hardened Wall Street investors, so it's understandable that individual investors are petrified. But the difference between pros and amateurs in the investing game is discipline. They look at their portfolios the way that a boss looks at their employees, and they get rid of poor performers. Under no circumstances will they fall in love with stocks or out of love with them. The same goes for funds.

A survey of over 1,800 finance chiefs around the world has found that employees are more frequently using retirement funds to pay their bills. So-called "hardship withdrawals" from 401(k)s and other retirement accounts have been increasing at 20% of the companies surveyed by Duke University and CFO Magazine.

Finance gurus are attributing the hardship withdrawals to bad credit markets and increasing costs of living. They say that employees are dipping into their retirement funds early to make mortgage payments and avoid filing bankruptcy.

But using retirement funds before you reach retirement age comes with a big price. While the law in the U.S. is set up to allow access to the funds in certain situations, in many cases, the withdrawal will be subject to interest and penalties.

On average, taxpayers can lose about 50% of their withdrawal to federal and state taxes and penalties. So if someone withdraws $20,000 to catch up on a mortgage and other bills, they can expect to take a hit of around $10,000 on that money when tax time rolls around.

For this reason, consumers should only do a hardship withdrawal if they are in dire need of the funds. Otherwise, I recommend stopping all new contributions to retirement funds, and using the money that would have gone into your 401(k) to help ease your financial burden.

Forensic accountant Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations through her company, Sequence Inc. Forensic Accounting. The Association of Certified Fraud Examiners honored Tracy as the 2007 winner of the prestigious Hubbard Award and her first book, Essentials of Corporate Fraud, will be on bookshelves in March 2008.