Raiding Your 401(k) to Refinance

[question everything]

FEBRUARY 23, 2009


Raiding Your 401(k) to Refinance
WSJ

Mortgage brokers say that some of their clients are reaching into their retirement savings to "buy down" the principal on their mortgage in order to qualify for a lower-cost loan or because they don't have enough equity in their home to refinance. While early withdrawals may be viable as a last resort, financial planners generally discourage them.


Here are answers to some questions homeowners should be asking.
—Nick Timiraos

Q: When are borrowers allowed to take money out of a 401(k) account to buy down a mortgage?

A: Only under narrow circumstances. Borrowers can't take money out of their 401(k) unless they qualify for a "hardship withdrawal," as outlined in a company's policy. For homeowners, Internal Revenue Service guidelines stipulate that such withdrawals can be made only for a first-time home purchase or to prevent foreclosure on a principal residence. While the IRS doesn't set a maximum withdrawal limit, companies generally won't allow employees to take out more than is absolutely needed to stave off an emergency. That means that borrowers looking to withdraw in order to refinance would have to demonstrate that, without the money, they would go into foreclosure. "It has to truly be a last resort," says Dean Kohmann, vice president of 401(k) plan services at Charles Schwab Corp.

Q: What are the costs of an early withdrawal?

A: Borrowers must pay taxes on early withdrawals from either a 401(k) or an individual retirement account, and borrowers younger than 59½ usually must pay a 10% penalty. If borrowers withdraw from a 401(k), they must wait six months before they can begin contributing to their 401(k) again.

Q: Are there alternatives to taking an early withdrawal?

A: Yes. Many companies allow employees to borrow from a 401(k). Those loans are limited to half the value of the account, up to $50,000, and loans generally have to be repaid within five years with interest. One big risk: If the borrower leaves the company, the loan must be repaid to avoid owing taxes. If a homeowner must borrow from a 401(k) account to refinance a mortgage, the decision should be "part of a well-thought-out plan as opposed to a quick fix," says Mr. Kohmann.

Loans or withdrawals shouldn't merely postpone a foreclosure for a few months. And remember: 401(k) accounts can't be touched by creditors in the event of a bankruptcy -- which means that borrowing money from such an account may cause you to forfeit protection.

http://online.wsj.com/article/SB123544106284055365.html (subscription)

[DFW]

1. I just checked my 401k--oops, nothing left in it

Good thing I have nothing to refinance!

[tech3149]

2. Sorry about that!

I've got three retirement accounts, two IRA's and a 401K, two have taken a 50%+ dump over the last year. The other one has held a minor increase until the last statement, no major loss but considering the situation I call that a plus.

I have to admit I was about two steps behind changing the investment balance. I saw that I was heavy on sectors that were on the way down but didn't shift the funds in time.

The way things are today, I'm not going to try and guess where I can move the money to lose the least. I'll just hold out for a few years and see who comes out on top.

I'm just glad to have a garden and don't plan to live a long life (unless I find somebody that needs me to hang around).

[DFW]

3. I have a family I am actually quite fond of

However, the garden bit sounds sensible. Of course, where we live most of the year, everyone
was told not to eat ANYTHING that grew locally for a couple of years (we were right in the
path of the Chernobyl cloud of radiation), so maybe not. My wife has already beaten cancer
once, and we're not looking forward to giving it a chance to even the score.

[Common Sense Party]

4. Nothing left? Really? NOTHING?

What were you invested in? All those investments went to zero?

[DFW]

5. A bit of hyperbole there--a few rupees are left for Buddha's alms box

Although: that 1000 shares of Worldcom stock that Smith Barney so wisely
invested me in back in 2000 are literally nothing. Let's just say that it's
a good thing I do not have to depend on my 401k as it now stands to live on
if I ever live to see retirement. The way things are now going, I give myself
about a 50/50 chance. I am told that getting less than 4 hours of sleep a night
and spending half your waking time in airplanes or otherwise traveling is not
a recommended path to longevity.

[Common Sense Party]

6. Yeah, Worldcom screwed several people. It's one of the reasons

I stay away from individual stocks. I don't want to be hosed like that.

Your lifestyle sounds similar, except I get 5 hours of sleep and spend most of my waking hours in a car (occasionally on airplanes).