Taking From 401(k) For Mortgage: Bad Idea

Ray Martin Advises Strongly Against It

(CBS)  The downturn in the economy is forcing some people to do something drastic -- take a "hardship withdrawal" from their 401(k) to pay their mortgage. The Early Show's financial expert, Ray Martin, says in this column that such a move is a big mistake.

---

More Homeowners Taking From Their 401(k)s
Record-keeping and phone service providers for large 401(k) plans are reporting an increase in requests by folks to withdraw money from their 401(k) accounts.

The recent reports indicate that more and more of the withdrawls are of a special type, known as “hardship withdrawals."

Several large retirement plan administrators say the most common reason cited for taking those withdrawals is to prevent foreclosure on the mortgage of, or eviction from, a home.

Hardship withdrawals are different from loans, in that they are taxable as income and do not have to be repaid. Hardship withdrawals, which are widely available in most 401(k) plans, allow individuals in certain situations to take money from their 401(k) plan accounts while they are still working with the employer who sponsors the plan.

Hardship withdrawals may be taken from a 401(k) plan only if the plan allows such withdrawals, and only if the funds are needed to meet an immediate and heavy financial burden -- for instance, if you cannot get the money needed from any other reasonable source.

According to government rules, hardship withdrawals are permitted for the following reasons: medical expenses that exceed 7.5 percent of adjusted gross income, purchase of a primary residence, payment of qualified tuition expenses, funeral or burial expenses, home repair expenses due to casualty losses, and the need to prevent eviction or foreclosure of the mortgage on a primary residence.

There are several downsides tof taking hardship withdrawals from a 401(k) plan.

The amounts distributed are taxed as ordinary income and, if the individual is under age 59-and-a-half, an additional ten percent penalty will apply to the amount withdrawn. Also, about 85 percent of employer 401(k) plans bar employees from making 401(k) contributions for six months after taking a hardship withdrawal. Amounts taken from a 401(k) plan in the form of a hardship withdrawal cannot be repaid or put back into the account. Finally, employers often require an employee to provide a written representation of their reason for requesting a hardship withdrawal and why the need cannot be satisfied from other reasonable resources -- and that means employees have to reveal their personal and private matters.

If your 401(k) plan allows you to take a loan, it may be wise considering doing so. Unlike hardship withdrawals, amounts borrowed through a 401(k) plan loan are not taxable as income unless the balance goes unpaid. Also, you can replace the borrowed money by making payments back to your own account.

But for some people, the problem is that you have to be an employee to be able to take loans from your current employer’s 401(k) plan. Loans are generally not available to former employees who have left their 401(k) account in their former employer’s plans.

For some folks, the unfortunate reality is that if they truly need to take a hardship withdrawal, taking a loan instead is not going to help: They would just have another loan payment to make.

But individuals with a 401(k) plan account who are facing financial difficulties and are no longer with their former employer and typically cannot take a loan from their 401(k) plans should consider transferring the funds in their 401(k) account to an IRA. That’s because, under certain circumstances, hardship withdrawals that are free from the ten percent tax for early distributions can be taken from an IRA.

There are nine special situations where withdrawals can be taken from and IRA that are excluded from the 10 percent early withdrawal penalty tax. These include disability, death, payment of non-reimbursed medical expenses, first-time purchase of a home, payment of qualified higher education expensesm, and withdrawals used to pay for medical insurance premiums.

While IRA withdrawals taken due to those special situations would be taxable, they would be free of the additional 10 percent penalty tax. And in certain situations, it may be wise to do that. For example, say an individual has an IRA and also needs to pay health insurance premiums in a year when they become unemployed. As long you have received unemployment compensation for at least 12 weeks and the IRA withdrawal is made in the year of, or the year followingm unemployment, then the withdrawal could be exempt from the additional 10 percent early withdrawal penalty. To properly report penalty-tax free withdrawals from an IRA, you’ll need to complete IRS form 5329.

Finally, for some folks in true hardship situations, it may be advisable to seek other forms of financial relief, rather than stripping cash from their retirement plans. One reason is that, under federal law, assets held in an employer’s retirement plan or an IRA are excluded from judgments for creditors during bankruptcy. Rather than spending down retirement assets, only to prolong the inevitable bankruptcy, it may be better to preserve those protected assets and get the bankruptcy process under way sooner. And, since many states provide some exemption for your home after bankruptcy, you’d still own that and your 401(k) or IRA account.

Also, low income individuals (including those who suddenly lose their jobs) who face sudden and large uninsured medical expenses may also qualify for a certain form of Medicaid benefit that takes into account primarily income. Stripping out cash from retirement accounts here may be unnecessary, and it may be advisable to get the Medicaid application process going. In both situations, it’s advisable to seek the services of a qualified attorney to provide advice on the best course of action, before takinge a nickel from your 401(k) plan.

[forthepeopl1]

I HOPE EVERYONE READS THIS............FORGET 401S WAIT UNTIL INSURANCE COMPANY ARE PAYING IN THE TRILLIONS FOR BURN DOWN HOMES.

CANT WAIT...........................

[forthepeopl1]

YOU DONT HAVE TO WORRIE ABOUT LOSEING YOUR CREDIT, OR BANKRUPTY, WHAT A GREAT IDEAR..............

INS/ PAYS FOR YOUR BURNDOWN HOME AND PUTS YOU IN A NEW ONE..

NO MONEY OUT OF POCKET.....................

OOPS DONT KNOW HOW THAT HAPPEN....KIDS WERE YOU PLAYING WITH MATCHES AGAIN OR A LIGHTER TO START A BARB Q. OPPS BURN BABY BURN.............

MORG/ 300000 PAYED IN FULL....OH I DO GET 450000 THANKS THATS A 150000 WIN FALL INSTEAD OF LOSEING HOME SOON BETTER DOESN''T IT....

[cosmotopper]

The information provided about early withdrawal was probably accurate, but the commentary about borrowing against your 401K was misleading. In fact, the terms of the loan are set by the employer, and there is nothing in the law which requires them to stop making contributions just because the employee has a loan. In fact, when you borrow from your 401K you are actually loaning the money to yourself, so the interest you are paying is being paid to yourself as well. Unfortunately, the employers can impose monthly service fees (they did in my case: $12 a month on a $5000 loan), and they imposed a $150 setup fee. However, if you''re desperate, a loan to yourself from your 401K may be one of your best possible options, depending upon the terms setup by your employer, which must be clearly documented in the plan.

[cosmotopper]

The information provided about early withdrawal was probably accurate, but the commentary about borrowing against your 401K was misleading. In fact, the terms of the loan are set by the employer, and there is nothing in the law which requires them to stop making contributions just because the employee has a loan. In fact, when you borrow from your 401K you are actually loaning the money to yourself, so the interest you are paying is being paid to yourself as well. Unfortunately, the employers can impose monthly service fees (they did in my case: $12 a month on a $5000 loan), and they imposed a $150 setup fee. However, if you''re desperate, a loan to yourself from your 401K may be one of your best possible options, depending upon the terms setup by your employer, which must be clearly documented in the plan.

[cosmotopper]

The information provided about early withdrawal was probably accurate, but the commentary about borrowing against your 401K was misleading. In fact, the terms of the loan are set by the employer, and there is nothing in the law which requires them to stop making contributions just because the employee has a loan. In fact, when you borrow from your 401K you are actually loaning the money to yourself, so the interest you are paying is being paid to yourself as well. Unfortunately, the employers can impose monthly service fees (they did in my case: $12 a month on a $5000 loan), and they imposed a $150 setup fee. However, if you''re desperate, a loan to yourself from your 401K may be one of your best possible options, depending upon the terms setup by your employer, which must be clearly documented in the plan.

[cosmotopper]

The information provided about early withdrawal was probably accurate, but the commentary about borrowing against your 401K was misleading. In fact, the terms of the loan are set by the employer, and there is nothing in the law which requires them to stop making contributions just because the employee has a loan. In fact, when you borrow from your 401K you are actually loaning the money to yourself, so the interest you are paying is being paid to yourself as well. Unfortunately, the employers can impose monthly service fees (they did in my case: $12 a month on a $5000 loan), and they imposed a $150 setup fee. However, if you''re desperate, a loan to yourself from your 401K may be one of your best possible options, depending upon the terms setup by your employer, which must be clearly documented in the plan.

[cosmotopper]

The information provided about early withdrawal was probably accurate, but the commentary about borrowing against your 401K was misleading. In fact, the terms of the loan are set by the employer, and there is nothing in the law which requires them to stop making contributions just because the employee has a loan. In fact, when you borrow from your 401K you are actually loaning the money to yourself, so the interest you are paying is being paid to yourself as well. Unfortunately, the employers can impose monthly service fees (they did in my case: $12 a month on a $5000 loan), and they imposed a $150 setup fee. However, if you''re desperate, a loan to yourself from your 401K may be one of your best possible options, depending upon the terms setup by your employer, which must be clearly documented in the plan.

[cosmotopper]

The information provided about early withdrawal was probably accurate, but the commentary about borrowing against your 401K was misleading. In fact, the terms of the loan are set by the employer, and there is nothing in the law which requires them to stop making contributions just because the employee has a loan. In fact, when you borrow from your 401K you are actually loaning the money to yourself, so the interest you are paying is being paid to yourself as well. Unfortunately, the employers can impose monthly service fees (they did in my case: $12 a month on a $5000 loan), and they imposed a $150 setup fee. However, if you''re desperate, a loan to yourself from your 401K may be one of your best possible options, depending upon the terms setup by your employer, which must be clearly documented in the plan.

[cosmotopper]

The information provided about early withdrawal was probably accurate, but the commentary about borrowing against your 401K was misleading. In fact, the terms of the loan are set by the employer, and there is nothing in the law which requires them to stop making contributions just because the employee has a loan. In fact, when you borrow from your 401K you are actually loaning the money to yourself, so the interest you are paying is being paid to yourself as well. Unfortunately, the employers can impose monthly service fees (they did in my case: $12 a month on a $5000 loan), and they imposed a $150 setup fee. However, if you''re desperate, a loan to yourself from your 401K may be one of your best possible options, depending upon the terms setup by your employer, which must be clearly documented in the plan.

[cosmotopper]

The information provided about early withdrawal was probably accurate, but the commentary about borrowing against your 401K was misleading. In fact, the terms of the loan are set by the employer, and there is nothing in the law which requires them to stop making contributions just because the employee has a loan. In fact, when you borrow from your 401K you are actually loaning the money to yourself, so the interest you are paying is being paid to yourself as well. Unfortunately, the employers can impose monthly service fees (they did in my case: $12 a month on a $5000 loan), and they imposed a $150 setup fee. However, if you''re desperate, a loan to yourself from your 401K may be one of your best possible options, depending upon the terms setup by your employer, which must be clearly documented in the plan.

[tom4144]

Ray Martin, like many "Financial Experts" who wear Armani suits and Rolex watches while pontificating about what a mistake it would be to tap into a 401(k) seem to miss the core issue.

Will someone borrowing from a Company 401(k) save his/her home. Or is borrowing from a Company 401(k) in reality throwing good money after bad.

Many American homeowners are truly between the proverbial "rock and a hard place" because if they don''t use 401(k) money to make mortgage payments they will in fact lose their home.

Homeowners need to take a reality check to determine if they are actually saving the home or just postponing the inevitable, foreclosure and a depleted, perhaps severely, Company 401(k). In this were the case a person will lose both a home and a retirement nest egg.

Recently in California a man who had paid $455,000 in 2005 for a brand new could no longer make payments that jumped from $2,950 a month to $4,000. Like kind houses were selling for $285,000. If this guy had a Company 401(k) with $100,000, would you suggest he tap into it and subsidize his mortgage payments hoping the real estate market would turn around?

I would not because he might still be under water (negative equity) years from now. This guy might be better off by just mailing in the house keys to the Lender and walking away. I know this sounds heretical to some but businesses do it all of the time.

[forthepeopl1]

Several hedge funds with assets of more than $4 billion (#2 billion) were on the brink of collapse last night or had halted withdrawals, despite moves by the US Federal Reserve this week to ease America%u2019s deteriorating credit crisis with a $200 billion collateral lending facility.

The potential closure of six funds came as a leading private equity executive, who declined to be named, said that such funds were %u201Csnapping like twigs%u201D, with one failing every day.

Yesterday Patti Cook, Freddie Mac%u2019s chief business officer, predicted that the Federal Reserve%u2019s $200 billion bond lending facility this week would fail to solve the long-term problem of Wall Street%u2019s deepening credit crisis.

The funds%u2019 predicament %u2013 seven funds have been frozen this month %u2013 was seen as evidence that the initiative by America%u2019s central bank to allow lenders to swap their risky mortgage-backed bonds for safer Treasury debt, will be of help only in the short term. Those fears hit the dollar and New York equity markets, with the greenback falling to a new low against the euro and sterling, as the European currency hit $1.55 for the first time.

TIME TO LET THE BANKS GO DOWN JUST AS WE AMERICANS ARE BEING TOLD BY OUR MORTGAGE COMPANYS TO BAD,SORRY WE CANT HELP YOU,GET LOST,OH WELL. F-THEM THEY DONT CARE WHY SHOULD WE. BURN BABY BURN

[forthepeopl1]

TODAY THE GOVENRMENT IS PUTTING ANOUTHER 300 BILLION INTO THE MARKET...THATS OVER 5000000000000000000 TRILLION IN LESS THEN A MONTH..TO SAVE THE BANKS NOT AMERICANS...BURN BABY BURN

[Razzl]

The key phrase here is "inevitable". If eviction without clear housing options is looming as more inevitable than retirement without much income, then breaking into the piggy bank to buy time is the only option left. I don''t know anyone who can choose to go into an unknown future without housing in order to save what''s probably a meager pension resource for an indeterminate span of years. The problem is not their choices, but the breakdown of the pension system that makes such a choice possible. The facts of this situation once again refute right-wing arguments against the Social Security system and show why social welfare arrangements for retirement, health care, and daily expenses of the indigent are necessary to meet our obligations as a civilized society. At least this time around enough smug upper-middle class Republicans are hurting that they won''t be so quick to jump on the anti-government bandwagon in the future...

[unknown45-2009]

Okay...advise was correct, but my take on is how do you know that the economy is going to be better in future?...the dollar is getting weaker and oil companiese are scamming people to believe that we are having oil shortage. The true fact is that working class people are going to be forced out of job in future. The richies are getting richer and poor are getting poorer. so Where do you draw the line all the companiese cross the country do not match cost of living increase. The most people are still making the same or little more by $.15 extra hours, but cost of standard of living is been increased drastically past 2 years by let say 15%. What is up with oil companiese making rrecord breaking profit of 40billion dollars in 2007 along. Most people who area living by pay check to pay check...they no alternative to keep their house. So where people are turning to 401k......The advise from the financial advisor is great, but it does not help the people who are struggling already. He does not care because he has posh paying job and multi-million dollar house somewhere.