Reverse Mortgage Guide

Does it make sense to borrow from retirement savings to pay off current debts?

Chicago Tribune financial columnist Gail Marks-Jarvis points out that “under federal law, people are allowed to borrow from their 401(k), but the intent is to let you borrow only for the short term. You are expected to pay the money back, and you are given no more than five years to do it. If you lose your job, you have to pay it back quickly, usually within 90 days.

“If you fail to pay the money back on time, you have to pay taxes on everything you owe. In addition, there will be a 10 percent penalty.

“This is a lousy way to get your hands on quick money. For example, if you were in the 25 percent tax bracket, took out $10,000 and didn’t repay it, you would only get your hands on $6,500. You’d have to turn $3,500 over to Uncle Sam.”

The problem with this scenario is that it is both true and likely to be ignored by desperate borrowers.

For instance, if someone has $10,000 in credit card debt and $10,000 in a retirement account that can be used to pay it off, then a 25 percent tax rate is irrelevant — that’s what many credit cards now charge (and less than some charge).(See retirement account managers for specific withdrawal policies and costs.)

Mortgages typically have far lower interest rates than credit card debt, so there is less logic to paying off a mortgage with retirement fund money.

I think people should hang on to retirement money to the extent possible. But the reality is that some people have debts that are eating them alive. For those with real estate equity, a reverse mortgage may well be a better option than taking money from retirement accounts. There’s no tax and no withdrawal penalty with reverse mortgages, and that’s not a bad deal if it means getting rid of debts that are forcing someone toward foreclosure and bankruptcy.

For the whole article from the Chicago Tribune, see: Raiding 401(k) not a good way to pay mortgage.

Related Resources You May Like

This entry was posted on Sunday, January 6th, 2008 at 9:49 pm and is filed under Reverse Mortgage . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.