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Cashed Out: Congress might make it easier for people to dip into their 401(k)s

In down economic times, it isn’t uncommon for people to feel the urge to dip into their assets to help make ends meet. Therefore, it isn’t a surprise to hear that more and more people are borrowing from their 401(k) plans for a little extra cash. Some people are even paying hefty taxes to permanently withdraw money from their 401(k)s .

Now, two new bills, H.R. 5822 and S. Amdt. 5004, would waive the 10 percent penalty tax on withdrawals from 401(k) accounts for workers whose homes are entering foreclosure status.

As well-intentioned as the waiver might be, we fear it could lead to bad consequences. Taking money from a 401(k) plan to save a house might be a quick fix but it can also jeopardize your future retirement security.

401(k) plans are, after all, supposed to be for retirement. And with employers freezing or terminating their pensions at a rapid rate, 401(k)s may be the only source of retirement income other than Social Security for millions of Americans.

A steady stream of reports has found that contributions to 401(k) plans are dropping, people preparing for retirement hold serious misconceptions about their retirement needs, and many Americans are inadequately prepared for retirement. Combine these circumstances with a volatile stock market and the concept of making it easier for workers to raid their 401(k) plans for non-retirement purposes, and it creates a perfect storm.

There is another drawback to these bills that may not be so obvious. Money in your 401(k) is protected from creditors. Your house is not. There is no guarantee that using 401(k) money will prevent a home from falling into foreclosure later. If the house falls into foreclosure even after you’ve tapped into your 401(k), you’ve lost your house and your retirement fund. H.R. 5822 and S. Amdt. 5004 may create a bigger problems than they solve by converting money that is protected from creditors into a vulnerable asset.

We don’t want anyone to lose their home, but if people use their 401(k) money now, what will they have left for retirement? Instead of a quick-fix, Congress should be looking for a long-term solution to the mortgage crisis – one that today’s homeowners won’t regret 20 years down the road.

What do you think?

Comments

Why is ANYONE surprised about this FACT. A 401K is simply a "savings" account that is targeted for retirement. What has the Government been saying for YEARS. The American people are not SAVING enough - they study this, they report on this, and they even discuss credit card debit with this. NOW they want to "enable" a American public to spend - and oh, these poor people who were "SCAMMED" by mortgage brokers, real Estate agents, and BANKS (which for me was the GREATEST Surprise for me) - they are now in trouble with their houses being foreclosed on. What is the consequence when you OVERBUY a house, you get in trouble and you "pay" for the consequence of your actions. I personally feel that the government is getting into our lives way to much. It is not the JOB of the "we the people" representatives to bail out "STUPID" - sorry it isn't and this "bailout" is proof that the government is the worst teacher in this country. EVERY teacher in this country will tell you, you learn by mistakes. It is sad we are doomed to repeat this "BAILOUT" again, just like the savings and loan of the 1980's. WHEN will Congress learn to stay out of things and as Treasury Paulson said let it follow its course. Now Congress is proposing to use the 401K savings account NOT for retirement but to prevent people from "downsizing to an apartment". We elect these people...... 9% approval rating..... no wonder.

I wonder if the American Institute of Certified Public Accountants will take a position against these bills. Look at the press release they issued: http://tinyurl.com/6b7hho

(from AICPA's web site: http://www.aicpa.org/MediaCenter/homepage.htm)

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