Can forclosure get your 401k

Answer 1

You've heard the news: Foreclosures are up, home prices are down and even borrowers with good credit are increasingly late with their mortgage payments.

Previously, many of those borrowers would look to home equity as a resource to cover shortfalls. But with that option off the table for many, increasing numbers of people are considering tapping into a second large asset -- retirement savings.

For some people, "It's more important to have the cash in hand today than in retirement, which is a much more abstract goal," says Brad Huffman, a Certified Financial Planner with Future Finances in Columbus, Ohio.

Most 401(k) plans and IRA accounts have rules in place that let you use your retirement savings to prevent foreclosure on your primary residence, either by offering loans on the balance or allowing you to simply withdraw the money.

"Congress wrote the rules so that in an emergency you can use the money to meet your needs," says Stephen Utkus, director of Vanguard's Center for Retirement Research. "The rules reflect a realism about our financial lives."

About 85 percent of employees with a 401(k) have access to loans, and 89 percent of 401(k) plans will let you withdraw money if times get really tough, according to 401khelpcenter.com. A closer look shows 18 percent of workers had a loan outstanding from their retirement plan last year, according to the Transamerica Center for Retirement Studies. And the Employee Benefit Research Institute says approximately $320 billion in 401(k) loans were outstanding at the close of 2006.

But is tapping hard-earned dollars earmarked for your golden years a good idea?

Before you use retirement assets to bail yourself out of a housing crisis, there's a lot to consider. It might not be the life raft you'd hoped it would be, and you could be making an irreparable dent in your retirement assets.