Can I Borrow from My Retirement to Avoid a Foreclosure?
If you are facing foreclosure, you may be willing to do anything to stop it. One option that many people consider is borrowing money from a retirement plan. In some cases, you can do this without any problems. In other situations, you may have to pay an early distribution penalty and taxes on the money.
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401(k) Loans
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If you have a 401(k), one way that you could take money out of your retirement plan to help with a foreclosure is through a 401(k) loan. Not every 401(k) plan has a loan provision, but many of them do. If your 401(k) allows loans, you can borrow money and then repay it over a certain amount of time. You will have to repay the money to your 401(k) with interest.
Hardship Withdrawal
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Another option that you may consider is a hardship withdrawal. The IRS allows hardship withdrawals from retirement accounts for certain situations that are considered to be financial hardships. One of those situations is a foreclosure. If you are facing foreclosure, the IRS will allow you to take out the amount that you need in order to fix the problem. The rules specify that you have to obtain any 401(k) loans before tapping other retirement accounts.
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Penalty
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If you do not access your money through a loan and you simply take a distribution, you will have to deal with an early withdrawal penalty. This penalty amounts to 10 percent of the total value of the distribution. In addition to taking 10 percent out in a penalty, the Internal Revenue Service also requires you to pay taxes on the amount of the distribution. These two costs significantly reduce the amount of money that is available to you.
60-Day Rule
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If you only need a short-term loan to help stop foreclosure, you can take advantage of a rule by the Internal Revenue Service associated with rolling your account over into a new one. If you take money out of a retirement account with the expectation of transferring it to another type of retirement account, you have 60 days to work with without getting any penalty. If you can repay the loan within 60 days, you can use the money without incurring any penalty or taxes.
Considerations
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Just because you potentially could access your retirement funds to save your house, that does not necessarily mean that it is in your best interest. Some people become too emotionally attached to real estate and make bad financial decisions when trying to save it. If you have to destroy your chances at retirement just to save a house, you may want to reconsider your decision. You may be better off letting the lender take the house and leaving your retirement intact.
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