Should Retirement Accounts be used to Refinance Distressed Property
By Charles TurnerI’m not aware of having seen it brought up anywhere else: should 401ks and other retirement account tax laws be modified so that distressed homeowners can use the money to refinance or pay down mortgage debt on a primary residence without a penalty?
Wouldn’t it make more sense to allow someone to bail themselves out with money that is already theirs rather than to be forced in to bankruptcy or defeating years of intelligent saving in a single blow by penalties?
Of course, not everyone has a retirement to fall back on. When the both the real estate and stock markets were on the rise, there was a frequent mantra to retirement accounts, “Contribute ’til it hurts and then give some more.” Now there is money “locked” in these accounts.
Is it worth discussion?
How very sad that retirement income, which is in fact, ours, should be locked-up in any fashion. Notwithstanding, as humans we’re not necessarily the best when it comes to self control, so there is a need for spending restrictions… otherwise, some of us might spend our retirement on that new Maserati (with or without the gold chain necklaces and polyester shirts– unbuttoned, of course)… All and any retirement funds should be freely available in cases of medical need OR housing needs. Period. Been here, doing that…
To Charles-You can loan yourself money from your 401(k) for anything you want…and so could use that money to pay down mortgage debt. However, I wouldn’t recommend it because if you leave your current employer you could be forced to repay the loan or pay hefty tax penalties.
To Vivien-Your retirement is not locked up. Although I don’t see it talke about much, the IRS lets you begin annuitized payments from your 401(k) or traditional IRA at ANY point in your life. This allows us all to use our retirement accounts for what they are intended for-retiring, and at any time we like.
My take – I was excited to see this topic posted. NAR should start lobbying congress immediately to steal some steam from the stock bubble to fund the real estate bubble. But seriously, I think people (Americans) have really have a tough time saving for retirement as it is. We’ve already seen so many rob the equity from their house for new furniture, BBQs and flat screens. Charles’ proposal would allow them to fix the home equity problem by robbing their real retirement asset then giving them the opportunity to ATM their house just one more time.
I think its a really creative proposal that could help a lot of people. But I think it will have too many adverse affects that our already overburdened social security system will ultimately have to repay. In economics we say there’s no such thing as a free lunch and somebody somewhere is eventually going to have pay for this party many of you have been celebrating for so long.
I agree with MarketTimer. Most people haven’t been saving enough for retirement as it is and this would only make it worse. Now, I do sympathize with people not being able to get to their money (easily, anyway) in a time of dire need. However, they’ll just defer the pain until retirement if it becomes too easy to do this. Maybe a middle-way solution would be to allow them to borrow against their 401k, but somehow make it not tied to their job (now, if you want to borrow against your 401K it has to be worked out through your employer and you have to pay back the balance if yoiu leave or are laid off or face the 10% penalty). Certainly, if it’s a medical related issue that’s causing the potential bankruptcy, then I think the penalty should be waived.
That said, I think the major problem right now is not with people who have had a house for years (where years is something more than about 5 years), but with people who have bought much more recently. The problem is that they overpaid for “their” houses. The MBS markets now realize this. The banks now realize this. Wouldn’t it be better for people in this sort of underwater situation who have no hope of ever really being able to make the real payment to just walk away and buy some years later at a lower price they can afford?
Why do I put “their” in quotes above? How can we say that someone is losing “their” house which they bought 2 or 3 years ago with nothing down that they have no equity in now? How is there any “their” there? It’s all the lender’s. I have a lot more compassionate attitude for someone who has some equity in their home and is facing foreclosure because of some sort of medical issue. But for someone who was basically speculating that housing prices would continue to appreciate at double-digit rates forever and placed their bets accordingly, well, I have a hard time thinking that it was ever “their” house.
Not being an account or with the IRS, I know you can take out a loan against your IRA/401k for housing but can it be for anything other than a first time purchase?
And since it is a loan, you have to pay yourself back which won’t help the cashflow portion of most people’s mortgage woes.
What about allowing a withdrawl for a non-cashout refi bringing equity to a max of 20% plus fees? I have no idea what the stats are about homeowners/equity/retirement balances but wouldn’t allowing even a few to help themselves be better than nothing?
It is far from a total answer.
Tip,
You nailed it. Many people who think they “own” houses are really just renting.
Its my understanding that any funds withdrawn (not a loan) from an IRA have to be vested for at least 5 years. It is easy to borrow from a 401K but I think you have to pay it all back within a year.
Charles,
Yes, you can effectively take a loan out against your 401k for anything, provided you pay yourself back with interest. I’m not sure about your question about term requirements, but I don’t think you are right about it having to be vested for five years. My 401k is only three years old and I have taken out a loan from it before for a medical issue. In my plan the amount you take out cannot exceed half your vested balance.
This brings up an interesting issue though about the impact of using retirement money for investing in real estate (or closer to this topic, bailing out investor properties). My understanding is that you are allowed to use IRA and 401k money to purchase real estate as long as it is not owner occupied. I believe the technical term is a “self-directed equity trust”. Consider this example, a speculator who purchases a condominium unit in South Waterfront runs into trouble and cannot float it. She could conceivably sell the unit to her IRA (provided funds available) and collect rental income on the property. I believe that the rental income is effectively treated as a dividend would. I don’t know the extent to which this is or would happen as it is a fairly unknown practice. Probably not very much but certainly an option. I do not know if you could sell a “share” of a property to your IRA or 401k. I would think not.
Self directed IRAs are a whole different subject. You can’t touch anything your self directed IRA owns. You couldn’t sell your property to your IRA, the IRS would get you.
Your company 401k nor the typical IRA can be self directed.
I didn’t mention vesting but it does bring up the point that every IRA/401k is different beyond the tax code that created them. What I can or can’t do with mine, you might not be able to do the same.
Why not just allow people who bought foolishly to stop paying income tax and put all that money towards paying for their overpriced dwelling? That way Charles and his ilk can stay in business longer and we can keep these insane prices rising. Yeah, that’s the ticket! Or maybe, just maybe, those of us who live within our means can give all OUR savings to rescue the idiot homedebtors. I mean, it’s only fair.
Your retirement savings is never tied up. Take it out, pay the penalty and shut the F up. The reason it’s got restrictions is because we got huge tax breaks to save it.
I thought we had moved beyond Naysayer’s crap but obviously not. “Charles, I personally don’t agree with you. You pose an interesting question but here is why it won’t work.”
If you take half a second to look at the thread, it doesn’t help my ilk at all because it would keep people in their houses and not on the market.
Ok, it won’t work because if we allow people to start cashing out their retirement without penalty to pay for their ill-conceived house purchase then why not when they lose too much in Vegas? How about when they do a little too much blow and can’t pay their dealer? And then when they get old we’ll have to pay for their upkeep because they could never sell the family home to support themselves! Too many memories. We hear that from old people already when they’re asked to pay property taxes. They think because the place is paid for they should stop having to support their community. Sorry, sell it or get a reverse mortgage.
Why should those of us who didn’t jump on the insane housing market wagon NOT get to borrow from our retirement to go on a round the world cruise? Is buying too much house somehow more worthy?
And the policy you suggest would help your industry because it would free up more $$ to pump into the housing market.
Sorry if I’m abrasive but sadsacking for speculators and arrogant homebuyers offends me.
“She could conceivably sell the unit to her IRA (provided funds available) and collect rental income on the property.”
While self-directed IRAs do allow for you to purchase real esate or other investments that might not be offered by your stock broker, your IRA can’t borrow money. So to purchase a house as an ‘investment’, which I think the South Waterfront flipper example could legally do, your IRA would have to have enough cash for the entire purchase. I’m just guessing, but most people in this predicament have been either dumping all their money into highly leveraged illiquid real estate transactions or into SUVs and plasma screens. So they probably don’t have enough cash in their IRA to purchase a $300k+ condo.
Personally, I’ve chosen to limit my contribution to tax deferred accounts because the limitiations to what I can do with the money outweigh the tax benefits. So I’m hoping for the opportunity to use my savings to do my part to “bail out” some struggling homeowners in the coming months.
“If you take half a second to look at the thread, it doesn’t help my ilk at all because it would keep people in their houses and not on the market.”
Naysayer got pwned.