Last Ditch Money to Stop a Home Loan Foreclosure
By Daniel Lamaute
Are you facing the prospect of losing your home in a bank
foreclosure? Many who are experiencing a temporary financial squeeze will
withdraw cash out of their IRA in order to save their home. However, getting a
loan from your retirement account may be a smarter way to go than taking an IRA
As with most people your home and retirement savings probably
represent the bulk of your available assets. However, withdrawing money from
your retirement accounts, even if it's to protect against a foreclosure, will
cause you to lose a big part of your retirement money to taxes. A better
strategy is to take money out of your retirement funds by way of a 401k loan. A
loan from a 401(k) doesn't trigger any distribution taxes and avoids the 10
percent early withdrawal penalty, as long as you repay the loan.
When you have a job you generally can get a loan from your
employer's 401k plan. But once you leave or lose your job, as a rule, you can no
longer keep your 401k loan or borrow from the plan.
You may, however, be able to start your own individual 401k
plan, called a Solo 401k or Self-employed 401k, under new tax laws that became
effective in 2002. The paperwork to set up a Self-Employed 401k is easy. You can
also transfer any of your IRAs, 401k, SEP plan or other qualified retirement
funds to your Self-Employed 401k plan. Most Self-Employed 401k plans allow you
to borrow up to 50 percent of your account balance all the way up to $50,000.
The 401k loan is tax-free and penalty free.
Home loans in foreclosure hit a record high in the fourth
quarter of 2002. Experts predict this negative trend to continue until the
problems of a weak economy, anemic job market, and rising property taxes are
addressed. Small business owners and contract freelancers are especially
vulnerable to economic slumps. The small business owner unable to get a bank
loan often has to rely on his own savings to meet cash flow shortages.
The Self-Employed 401k is a qualified retirement plan that can
be set up by anyone who has a part-time or full-time business. This retirement
plan is similar to 401k plans of large companies. The difference is that the
Self-Employed 401k is designed for an individual and as such is less complicated
and less costly to maintain. Any person with a business with no employees can
set up a Self-Employed 401k plan.
The cost and features of Self-Employed 401k plans will vary
depending on the plan vendor. A typical plan cost less than $200 a year to
maintain and allow loans with terms of 5 years or more at an interest rate close
to prime rate. The good part is that all of your loan payments including the
interest go back to your 401k account. Take caution, however, because not paying
your 401k loan on time will trigger IRS tax consequences as if your loan was a