The economic downturn and mortgage crisis are turning a growing number of Americans into retirement account raiders.

The number of Americans tapping into their 401(k) savings accounts to pay debts or to fund other immediate financial needs rose sharply last year. The situation worsened during the first quarter this year as the mortgage crisis heated up, according to the Profit Sharing/401(k) Council of America (PSCA), a non-profit group sponsored by companies that offer benefit plans.

The number of people making outright withdrawals from retirement accounts also is rising-in some ways an even more distressing trend than the growth in loans.

Borrowing from a 401(k) may seem attractive when your back is against the wall. Since you’re borrowing your own money, it’s one of the easiest forms of credit you can qualify for. And the interest rate will be lower than some other forms of consumer debt-typically prime plus one or two points.

But 401(k) loans can spell short-term financial trouble, and it’s a long-term threat to your retirement security. It should be the very last option you consider when you’re having financial difficulty, not the first.

The percentage of 401(k) participants who’ve borrowed from their accounts jumped to 18 percent last year from 11 percent in 2006, according to a survey by the Transamerica Center for Retirement Studies, a non-profit organization focused on retirement issues.

But if you look only at the employer-sponsored retirement plans that offer a loan option, the numbers are higher. About 25 percent of the people in those plans have a loan, according to the PSCA. The average loan amount is $8,000.

The most common reason for borrowing was to pay off non-mortgage consumer debt, Transamerica found, and to some extent was prompted by mortgage problems. Overall, debt pressure was cited by 49 percent of borrowers, up from 29 percent in 2006.

What kind of risk do these loans entail?

Your biggest worry should be job security. These loans have five-year terms; if you leave your job for any reason before then, you must repay in full-or the loan is treated as a taxable distribution. Plus, if you’re under age 59-1/2, you’ll pay a 10 percent penalty if you default on the loan. In today’s climate of mergers, reorganizations and layoffs, there’s plenty of reason to worry that you could get slammed with a distribution of penalty.

“In many ways, a 401k loan is a wolf in sheep’s clothing, because the risks are so significant,” says Catherine Collinson, president of the Transamerica Center for Retirement Studies.

Hardship withdrawals have big drawbacks, too, and most experts aggressively discourage their use. The IRS only allows these withdrawals for limited and very specific purposes, including funding of medical expenses and funerals, paying mortgage debt or to avoid foreclosure or eviction.

The Internal Revenue Service requires employers to meet tough qualification requirements for approving hardship withdrawals, and employees must submit extensive documentation proving the hardship. “It’s the kind of information you might want to think twice about sharing with an employer,” says Collinson.

Then there’s the long-term damage to your retirement savings. Borrowing or withdrawing funds will inflict serious damage because of the time those funds won’t be earning investment returns. Also lost is the opportunity to earn returns on new investments; in most cases, you can’t make contributions while you have a loan outstanding, and you can’t contribute for six months after you make a hardship withdrawal.

I asked Transamerica to run some “what if” scenarios demonstrating just how much damage can be done. We worked with the example of a 35-year-old investor who plans to retire at 65, contributes $5,000 a year to a 401(k) account and has a current vested balance of $50,000.

You can download the what-if scenario here or by clicking on the image at left [pdf file].

But here’s a summary. If the money is left untouched, this investor would have $693,000 at retirement. Taking a $25,000 loan and repaying it over five years would reduce this investor’s account total at retirement to $576,000-a loss of 17 percent. The real killer would be a hardship withdrawal of $50,000; forced to start over with new contributions a year later, the investor would have just $378,000 at retirement-a whopping 45 percent reduction.

Do your homework carefully before jumping to the conclusion that a loan or withdrawal makes sense for you. Most of the big retirement saving companies can do a loan model for you to show you the impact.

Most important, take a deep breath and slow down. “When we’re under stress, it’s easy to have an impulsive reaction,” says Collinson. “Sit down and do your homework, and get a true picture of your overall financial situation. If you really are in a crunch and don’t feel you can solve it yourself, it’s worth the expense to get a reputable financial advisor to walk through it with you.”

Adds David Wray, PSCA president: “They key is that it should be the last choice, when you’ve exhausted every other possible option. If the problem is your mortgage, contact your lender and try to work out something; people everywhere are renegotiating and lenders don’t want to own houses. And if you have a job, you have some leverage.”

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Tags | 401(k), IRA, portfolio, retirement