Dropping Home Values has some Borrowing from 401K
For decades it was very popular for couples later in life to take funds out of their home equity to pay for bills, vacations and other expenses. However, the massive drop in home values, and more stringent banking processes has stifled this practice significantly.
With the foreclosure crisis that has rocked the housing markets in
Florida and
California, a reverse mortgage is now much less available, so retirees and near retirees have begun withdrawing from their
IRA and 401K accounts instead. This is a risky move that could be putting their retirement plans and savings in dire jeopardy.
A 401K holder is allowed to borrow from their account to pay for medical or educational expenses, buy a home, or prevent
mortgage default or eviction. This is known as a hardship withdrawal. However, they come with consequences. Most notably, you will have to pay income tax on the money you take out, and often times, a 10% penalty, as well.
Since the money is included in your income tax, it could end up costing you by bumping you up into a higher tax bracket, or forcing you to miss out on specific tax credits or tax deductions. Not to mention, your retirement plan will now be lower which means the compounded interest on your savings that get added to your account will not be as high as it would have been.
If you leave the job before the loan is repaid, even due to injury or inability to perform the job, you will owe income tax on the remainder and a 10% fee. One final kick where it hurts - your checkbook - if you withdraw from your retirement plan your employer may suspend making contributions for six months.
All in all, you can easily end up paying more than half of your withdrawal in interest fees and you could miss out on thousands of dollars in total retirement benefits possibly worth over 10 times your original withdrawal!
As you can see, taking funds out of your retirement plan should be an absolute last resort.
By: Javi Calderon
