Q: I want to buy a home before interest rates rise any more, but I don’t have much money for a downpayment. What are the pros and cons of using money from my 401(k)?

A: Most financial advisers discourage investors from taking money out of their 401(k)s before retiring.

Even if you can get it out without penalty, which I’ll get to in a moment, tapping this investment can mean giving up a lot of future profits.

For expenses such as a home downpayment, it’s best to tap ordinary investments.

If the 401(k) is the only source of funds you have, it’s a tough call.

Certainly, it would be better to tap this fund for a downpayment, which can be profitable in the long run, rather than for something such as a vacation, which is money lost forever.

There are two ways to get at money in your 401(k).

First, you can sell some of the investments to produce cash.

Any such sale would trigger a federal income tax on the money withdrawn, since that applies to all withdrawals. To get $20,000 for a downpayment, you’d have to withdraw nearly $27,000, assuming a 25 percent tax bracket.

Even worse, if you are not yet 59-1/2 or older, the withdrawal would most likely be subject to a 10-percent early withdrawal penalty. So you’d have to withdraw nearly $31,000 to produce $20,000 after paying tax and penalty.

Of course, you may think of the house as an investment. It should be, but keep your eyes open. The house will have to rise enough in value for your $20,000 downpayment to grow to $31,000.

That’s a break-even point – what you’d have if you didn’t pay tax and penalty. The house would thus have to grow in value by 55 percent.

With housing prices rising at a robust 10 percent a year – an optimistic assumption – it would take about four and one-half years for your $20,000 to grow to your break-even point of $31,000.

Depressed yet? Well, I’m not done.

Remember that in taking the $31,000 out of your 401(k), you gave up any investment gains that money could have produced had it been left there.

Breaking even, thus, means getting to some higher number – whatever the $31,000 would have grown to in the meantime. $35,000? $45,000? Who knows?

The point is that there’s a big cost to taking money from the 401(k).

You can’t be sure you’ll ever get it back by investing in the home.

The alternative is to borrow money from your 401(k). There’s no tax or penalty on these loans.

You’ll have to pay interest, probably a percentage point or two above the prime rate, which currently is 4 percent.

But the interest is paid to the 401(k), so it’s like paying yourself.

Don’t fall into the trap of thinking of this interest as an investment return; it’s just money you’re shifting from one pocket to another.

Under federal rules, the most you can borrow is $50,000, or half the value of the account, whichever is smaller. And not all employers permit loans.

Even if you can get a loan, check with the mortgage company to make sure this additional debt won’t make it harder to qualify for a mortgage.

Finally, keep in mind that you’ll suffer an “opportunity cost” just as you would in selling 401(k) assets. You’ll miss out on any investment gains this money could have earned had it stayed in the 401(k).

This is because loans are funded by selling assets in the account. By contrast, if you took out a margin loan with a stock broker, you’d simply be using the investments as collateral, and they’d continue to grow.

Obviously, the financial analysis has to be balanced against other concerns, such as the happiness you can get owning a home. But there are lots of homes out there, and you could always put off buying until you’ve saved enough for a downpayment without attacking your retirement money.

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(Jeff Brown is a business columnist for The Philadelphia Inquirer. E-mail him at brownjphillynews.com.)

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AP-NY-05-24-04 0629EDT