Taking money from an retirement account to pay debt poses problems

Real Estate Agent with

Americans are well known for their infatuation with debt and their inability to save. However, there have been two places that Americans have managed to save to accumulate wealth. do not take a heloc to pay off other debt

* The first is their primary residence, their home (believe it or not).

* The second is in retirement plans such as IRA and 401Ks.

The primary reasons these investment vehicles have been successful amongst the free spending is that they are both forced savings plans. People will pay their mortgage first. Before any bills.

If you have a fixed rate mortgage , principal will accrue and likely offer a nice savings nest egg down the road. The retirement plans/IRA also are often pre-tax withdrawals prior to receiving your after-tax paychecks. Again, a forced savings.

Amidst these surviving opportunities to save money for later in life is a growing problem that is happening much too often.

Americans who are facing difficult financial situations are pillaging both these valuable resources.

Now, there are circumstances that require a move to empty a 401K or get a (HELOC) /Home equity line. Though, these are last resorts. And, sadly, more and more frequently, people are taking on new debt (yes, these are loans) to pay other debt.

The problem with taking from a Home Equity Line is that you rarely pay off the debt. Most hope to sell their home at some point in the future. However, debt accumulates quickly. Also, you are paying interest (more than 7%) on your own money.

If your home grows at historical rates, you are just breaking even; not at all saving for the future.

Taking money from an retirement account poses a whole new set of issues. There are serious tax implications for early withdrawal distributions that you must be aware. These tax issues need to be explained by a CPA only!

Also, and most dangerously, it is very rare that someone every repays their IRA or 401K. Typically, if you need money for financial hardship, you rarely pay it back in a lump or installments. Ultimately, that money is not working for you over the years and you will pay the price when you need that money down the road.

When people are struggling the predators come out with promises and untold offers to reduce debt and offer debt consolidation. It may sound callous. However, Yes, I do mean to scare you.


Michael S. Mackey
CENTURY 21 All Islands - Mililani, HI

James, you have really hit upon a sad an unfortunately growing problem. I have friends that have raided their 401's to make unnecessary home improvements. They took the early withdrawal penalty, and I'm afraid they will really regret this when they get closer to retirement.

Feb 27, 2009 05:58 PM
Toula Rosebrock
Diane Turton, Realtors, Forked River, NJ - Lacey Township, NJ
Broker/Sales Associate, Realtor, Lacey Township,

ToulaRosebrock.comHi James:

As tempting as it may be to touch a 401K, it definitely should be avoided.

Nice post and a good reminder!

Have a wonderful weekend.

Feb 27, 2009 10:08 PM
Bill Gassett
RE/MAX Executive Realty - Hopkinton, MA
Metrowest Massachusetts Real Estate

Taking money out of a retirement account is the last thing people should do to pay bills. Eventually things will bounce back and taking the money out would dramatically cut the long term gains.

Feb 27, 2009 10:34 PM
Larry Bettag
Cherry Creek Mortgage Illinois Residential Mortgage License LMB #0005759 Cherry Creek Mortgage NMLS #: 3001 - Saint Charles, IL
Vice-President of National Production

These are really good points.  I think it's fine to do so, but the parameters of doing such are very limited.  Much thought needs to occur for this to be useful....truly.

Feb 28, 2009 01:58 AM
Jim Frimmer
HomeSmart Realty West - San Diego, CA
Realtor & CDPE, Mission Valley specialist

I just opened a Diet Coke but it's a good thing I hadn't taken a drink yet because I would have choked on the laughter when I read your first sentence:

Americans are well known for their infatuation with debt and their inability to save.

I look forward to seeing that quote and your name in the next edition of Bartlett's Quotations -- LOL.

Feb 28, 2009 11:21 AM
Laura Cerrano
Feng Shui Manhattan Long Island - Locust Valley, NY
Certified Feng Shui Expert, Speaker & Researcher

James, I too have heard this quite often.  I know it's scary times but if people can avoid using their retirement and 401K plans, they should try to find another way.  Retirement will be much more difficult.

Feb 28, 2009 03:22 PM