By Joellen Leavelle
In down economic times, it isn’t uncommon for people to feel the urge to dip into their assets to help make ends meet. Therefore, it isn’t a surprise to hear that more and more people are borrowing from their 401(k) plans for a little extra cash. Some people are even paying hefty taxes to permanently withdraw money from their 401(k)s .
Now, two new bills, H.R. 5822 and S. Amdt. 5004, would waive the 10 percent penalty tax on withdrawals from 401(k) accounts for workers whose homes are entering foreclosure status.
As well-intentioned as the waiver might be, we fear it could lead to bad consequences. Taking money from a 401(k) plan to save a house might be a quick fix but it can also jeopardize your future retirement security.
401(k) plans are, after all, supposed to be for retirement. And with employers freezing or terminating their pensions at a rapid rate, 401(k)s may be the only source of retirement income other than Social Security for millions of Americans.
A steady stream of reports has found that contributions to 401(k) plans are dropping, people preparing for retirement hold serious misconceptions about their retirement needs, and many Americans are inadequately prepared for retirement. Combine these circumstances with a volatile stock market and the concept of making it easier for workers to raid their 401(k) plans for non-retirement purposes, and it creates a perfect storm.
There is another drawback to these bills that may not be so obvious. Money in your 401(k) is protected from creditors. Your house is not. There is no guarantee that using 401(k) money will prevent a home from falling into foreclosure later. If the house falls into foreclosure even after you’ve tapped into your 401(k), you’ve lost your house and your retirement fund. H.R. 5822 and S. Amdt. 5004 may create a bigger problems than they solve by converting money that is protected from creditors into a vulnerable asset.
We don’t want anyone to lose their home, but if people use their 401(k) money now, what will they have left for retirement? Instead of a quick-fix, Congress should be looking for a long-term solution to the mortgage crisis – one that today’s homeowners won’t regret 20 years down the road.
What do you think?