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Law Would Allow Tapping Nest Eggs to Save Nests

Those far behind on their mortgage payments could soon sacrifice their 401(k) to save their house, under a bill introduced last week in Congress. Up to $50,000 could be withdrawn penalty-free – but not tax free – from retirement accounts under the “Home Act,” which the bill’s sponsors say will help stave off foreclosures.

But even though the bill is a long way from passing, the proposal beckons the question: when would it make sense to tap the nest egg to keep the nest? Rarely, financial advisers say. “Even if you are in a dire situation, I would still think two or three times before I would take out my 401(k), pay the taxes and throw it into a house,” says Roger Wohlner, of Asset Strategy Consultants.

There’s more emotion attached to a home than a retirement savings account, but the house shouldn’t always win,  he says. “People need a place to live – but you might be throwing good money after bad. You might be able to cover three to six months worth of payments and then be in the same boat – this time, with no retirement account left.”

As with hardship withdrawals from retirement accounts to cover medical expenses or other emergencies, there is also the matter of the IRS, Theodore Connolly, an associate with Duane Morris says. “A tax debt is far more dangerous and difficult to overcome than a mortgage debt,” he says. “I believe the only way the proposal makes sense is if the withdrawals were both penalty and tax free.  Then, the proposal would actually make a difference and not cause greater harm than good.”

Loans and withdrawals on retirement accounts have been taken out in huge numbers since the recession, with 28 percent of participants owing 0ustanding loans in 2010, according to a study by Aon Hewitt. But the Georgia Republicans co-sponsoring the bill — Senator Johnny Isakson, who spent years working in the real estate industry, and Rep. Tom Graves—insist that rescuing the economy cannot be achieved without first rescuing the housing market.

“This legislation will simply place taxpayers who have saved responsibly on the same level as those who have not, all the while reducing foreclosures,” Graves said in a statement.


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About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.