Use Caution When Tapping Into 401(k) To Make Mortgage Payments

The Baltimore Sun reports:

• Some companies that manage 401(k)s for employers report an increase in loans or hardship withdrawals from plans this year. Principal Financial, for instance, says hardship withdrawals to stave off eviction or foreclosure doubled in August from July. Baltimore's T. Rowe Price Associates reports a 9 percent increase in loans over a year ago. And Hewitt Associates has seen a "marginal uptick' in loans in recent months. With loans - unlike hardship withdrawals - workers don't have to say why they want the money. So it's hard to say how many desperate homeowners are using their savings this way. But David Wray, president of the Profit Sharing/401(k) Council of America, has no doubt that the uptick in loans is tied to the mortgage mess. Workers are just starting to deal with rate resets on mortgages and home equity loans, Wray says.

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• But dipping into retirement accounts should be the last resort. Even then, do it only if you're sure that your housing troubles are short-term. If they're not, you could end up losing your house and your retirement.

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• When loans are permitted, you can borrow up to half the balance but no more than $50,000. You generally get five years to repay through payroll deductions. [...] Leave or lose your job before the loan is repaid, and you might have to repay it immediately. If you can't, the loan is considered a distribution. You will owe regular income tax on the money and possibly a 10 percent penalty for early withdrawal. (The penalty usually applies if you take money out before age 59 1/2 , but the age limit is 55 if you're leaving your employer.)

For more, see Using 401(k) for mortgage payment can worsen plight (if link expires, try here).

See also:

• Don't get caught losing your home and retirement fund (Chicago Tribune) and
• 401(k) Loans: At Your Own Risk (Borrowing Rises a Bit Despite Long-Term Danger) (Wall Street Journal - 10-6-07; may need subscription).