401(k)s Tapped to Save Homes

Submitted by SadInAmerica on Wed, 03/12/2008 - 12:29pm.
Struggling to save their homes from foreclosure, more Americans are raiding their 401(k) retirement accounts to pay their bills — and getting slammed with taxes and penalties in the process, according to retirement plan administrators.

Rather than borrow money from their 401(k) accounts, which would have to be paid back, a growing number of beleaguered families have been cashing out, plan administrators say.

This is happening even as borrowing from 401(k) accounts remains fairly flat. Fewer still are borrowing from 401(k) plans to buy homes. By contrast, new figures from plan administrators show the number of 401(k) "hardship withdrawals" is up in early 2008 compared with the same period last year.

The main reason? The need to stave off foreclosure or eviction.

Consider Tamara Campbell, who raided her 401(k) after her husband was laid off from his job as an occupational technician, and they fell behind on their mortgage for several months. "If I hadn't done that, we would have been foreclosed on last year," says Campbell, who lives in a Denver suburb.

Such hardship withdrawals began rising last year and, by January this year, had exceeded January 2007 levels. During the first month of the year, as the economic slowdown tightened pressure on mortgage holders, hardship withdrawals rose 23% at plans that Merrill Lynch (MER) administers, compared with the same period in 2007, says Kevin Crain, managing director of the Merrill Lynch Retirement Group.

The 401(k) withdrawals are rising mainly because people such as Campbell and her husband want to save their homes. Merrill Lynch found that the primary reason for the rise in hardship withdrawals was to prevent foreclosure or eviction, based on its sampling of applications filed in January.

Likewise, in the first month of the year, compared with January 2007, Great-West Retirement Services saw a 20% increase in hardship withdrawals to save a home. And Principal Financial (PFG) reports that in January it received 245 calls from participants who inquired about 401(k) withdrawals to prevent a foreclosure or eviction, up dramatically from 45 similar calls it received in January 2007.

For workers, the consequences can be severe. About 85% of employers bar employees from making 401(k) contributions for six months after taking a hardship withdrawal, says Pamela Hess, director of retirement research at Hewitt Associates. (HEW) Worse, employees who pull money out of tax-deferred 401(k) plans before age 591/2 generally must pay a 10% penalty on top of the taxes owed.

A 401(k) loan imposes no such punishment. "But let's face it: If your problem is paying bills, and if you take out a loan, then you just add another bill to pay," says Nevin Adams of PlanSponsor.com, which monitors the 401(k) industry.

As Campbell considers whether to make another withdrawal, she notes, "It's not the kind of thing you want to use your 401(k) for. And if I keep doing this, I'm not going to have any retirement savings."

Christine Davis - March 11, 2008 - posted at www.usatoday.com

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Submitted by SadInAmerica on Wed, 03/12/2008 - 12:29pm.