With home equity tapped out amid the housing slowdown, cash-strapped Americans may turn next to their retirement plans.
Such a strategy is almost always one of the biggest taboos in retirement planning, but if you must do it, there are right and wrong ways to use this last resort, experts said.
Mortgage-related calls for help and inquiries about tapping workplace savings have risen substantially over the past year, according to ComPsych Corp. in Chicago.
The number of mortgage calls doubled in the first nine months of this year compared with the same period last year, said officials for ComPsych, which provides employee-assistance programs for about 10,000 employers.
Calls about 401(k) loans or withdrawals are up as much as 20 percent in the same period, said ComPsych financial specialist Bill Tettelbach.
"It's definitely bad out there," Tettelbach said.
Some experts say tapping a retirement plan in an extreme emergency, such as to prevent losing your house, isn't the worst thing that you could do. If you're pondering it, consider these tips to minimize the hit to your long-term future:
-- Borrow, don't steal.
In many cases, you are better off borrowing from your workplace savings plan rather than taking an early withdrawal, said Rick Meigs, president of 401khelpcenter.com in Portland, Ore.
If you take a withdrawal before age 59 1/2, you'll owe income taxes on the money immediately, plus a 10 percent penalty, the equivalent of stealing from yourself.
Most workplace plans--401(k)'s and many 403(b)'s--allow you to borrow up to half of your vested balance, not to exceed $50,000. Owners of self-employed 401(k)'s are also eligible. Some plans allow withdrawals of $10,000 even if the account balance is less than that, but the borrower is required to post additional collateral.
You'll need to begin repaying the loan right away, typically at 1 or 2 percentage points above the prime rate, Meigs said.
Most loans must be repaid within five years in roughly equal installments, but the time period can be extended for the purchase of a primary home. If you default on the loan, the entire unpaid balance becomes a taxable distribution, and you'll also owe the 10 percent penalty if you're younger than 59 1/2.
-- Assess job stability
A few employers allow you to leave the company and continue making payments on a loan (and a handful accept rollover loans from one employer to another), but most require borrowers to pay up before they ship out, said Mary Kay Foss, a partner with accounting firm Marzluft, Giles, Tulis & Foss, certified public accountants in Danville, Calif.
So consider your job stability before taking a loan, she said.
-- If it's not an emergency
Stuck in a workplace savings plan with crummy investment options? You could think of borrowing from the plan for investment reasons, not to dig out of a debt hole.
You could take a loan, then reinvest the money elsewhere for a higher return, paying yourself back in the workplace plan with interest, Foss said. Remember, this is a high-wire act, though, requiring you to stay on top of the repayments to avoid penalties, not to mention correctly picking investments that will outperform your company plan.
Retirement plan loans receive bad rap, Meigs said, and they should because most Americans haven't saved enough to be borrowing early. But there are good reasons for doing it, he said, such as avoiding losing your home.
And don't get hung up on the line of thinking that you will be paying more taxes to borrow from your plan than from someplace else, Meigs said. Yes, you will be repaying the loan with after-tax dollars and then paying income tax on withdrawals down the road in retirement. But you'd be repaying any other loan with after-tax dollars, too, so that's a wash, he said.
"The biggest con is the possibility of losing your job or changing jobs and having to pay it back all at once," Meigs said. "People change jobs so frequently today, and they don't think about that when they take out a loan."
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