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Georgia bill would allow use of 401(k) to pay mortgage debt (one) Atlanta, GA

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Georgia bill would allow use of 401(k) to pay mortgage debt (one)

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Recently, two members of the Georgia legislator proposed a bill that would allow homeowners to take money from their 401(k)s and other retirement accounts in order to pay down some of their mortgage debt. The stated goal of the bill is to help Georgia homeowners avoid default or foreclosure, but analysts are questioning whether using retirement funds for this purpose will cause greater financial harm in the end.

Under the proposed HOME Act, homeowners would be able to withdraw up to $50,000 or half of what is in their 401(k), whichever is smaller, without paying the standard 10 percent penalty fee for such early withdrawals. However, they would still have to pay income tax on the amount withdrawn if they are under the age of 59 1/2 years.

Most analysts agree that people who are facing the loss of their home should not have to pay the penalty fee for deciding to use their own money to save their home from foreclosure. However, with the continuing uncertainty surrounding the job market, experts are questioning whether homeowners would be throwing money away and causing even more damage in the end. Because 401(k) funds are protected from creditors, taking money from those accounts and putting them into a house that might still be lost to foreclosure might be too risky of a proposition. This could end up benefiting the large banks and mortgage instead of individual homeowners.

In addition, critics say that the people who are having trouble making mortgage payments are exactly those who should keep sufficient funds in their retirement accounts for security purposes. “If you are having a hard time controlling money, then you are dealing with the inevitable of either walking away from a home or bankruptcy,” said Casey Smith of Wiser Wealth Management in Marietta, Georgia. “At least keeping money in a 401(k) gives you some protection.”

We will continue this discussion in a blog post later this week.

Source: Atlanta Journal-Constitution, “Pay mortgage with 401(k) funds?” Christopher Quinn, Oct. 24, 2011

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