Image: Woman with sledgehammer © Brad Wilson-Getty Images

Related topics: stocks, 401k, airfares, accident, airlines

Never borrow against a 401k. Avoid credit cards. Make a bigger down payment on your house or apartment to avoid paying extra mortgage interest. These are among the financial rules consumers have been told to live by for years. But now -- with interest rates still low and credit staging a comeback -- might be a good time to break them.

This solid financial advice isn't suddenly all wrong, but many of these axioms no longer result in higher savings or less debt. That's because the economic recovery has opened up more exceptions and loopholes to standard advice, says David Peterson, the president of Peak Capital Investment Services, a financial planning firm.

Advisers, for example, typically discourage clients from taking a loan from a 401k -- but this is now the cheapest way to borrow money, with the average rate at 4.25%, lower than most personal loans. As some parts of the economy have improved -- equities are once again outperforming fixed income, banks are slowly returning to lending and consumers are spending more -- the rules for making and saving money are changing, at least temporarily.

Here are four traditional money rules you can break -- at least for now.

401k loans

  • Old-school advice: Avoid taking one at all costs.
  • Now: The most affordable loan available.

For decades, borrowing from a 401k plan was synonymous with derailing retirement savings. But right now, the cheapest bank for many borrowers -- especially those who feel secure in their job -- is their own 401k. Average interest rates on credit cards are 14% and on home-equity lines of credit 5.22%. But a 401k loan charges a fixed average of prime (currently 3.25%) plus 1%, according to the Profit Sharing/401k Council of America. Approximately 90% of employers offering 401ks permit employees to borrow from them, according to the PSCA, and the loans can last for up to 15 years.

These loans make most sense for consumers stuck with high-interest credit card debt. In a year, a borrower can save around $800 in interest with a loan that eliminates a $5,000 balance on a card with a 20% interest rate.

And the money the borrower pays back goes into the 401k -- not to a bank. Repaying can also be easier than it is with a regular loan, says Olivia Mitchell, professor at the University of Pennsylvania Wharton School, who recently coauthored a study on 401k loans. About 60 million people contribute to a 401k, according to the PSCA; once a loan is taken out, any contributions made via automatic payroll deductions first go toward paying down the loan.

But, there are still some pitfalls: If you lose your job or leave it voluntarily and can't pay the loan back within 90 days, you'll be hit with federal income tax on the outstanding amount, plus a 10% penalty if you are younger than 59 1/2. And you'll need to reallocate some of what remains into higher-yielding equities until the account is made whole, to avoid missing out on potential gains, says David Wray, the president of the PSCA.

Roth IRAs

  • Old-school advice: Convert a traditional IRA into a Roth to save on taxes.
  • Now: Stick with the IRA.

The appeal of the Roth IRA has always been that contributions, rather than withdrawals, are taxed, shifting the tax burden to pre-retirement instead of years down the road when taxes could be higher. Roth IRAs became even more user-friendly last year when taxpayers were allowed to convert from a traditional IRA regardless of income (the limit for conversions had been $100,000 modified adjusted-growth income). But in many cases, staying put in a traditional IRA will lead to bigger savings -- especially for people five to 10 years away from when they plan to withdraw their money, Peterson says.

Here's why: It can take years of tax-free growth to make up the taxes incurred during the conversion. For example, someone who converts $100,000 from a traditional to a Roth IRA and pays $30,000 in taxes will need at least five years to make that money back -- assuming a 7% rate of return. And that doesn't address the loss of compounding that would have occurred if that money didn't go toward paying taxes, says Sheryl Garrett, a fee-only certified financial planner.

There's also less time to pay taxes on this conversion now. Savers who converted from a traditional IRA to a Roth IRA last year were able to spread the income from that conversion over 2011 and 2012. But now, all of the income from a conversion made in 2011 (and after) is taxable at once.