The HOME Act was recently introduced in the U.S. House and Senate to encourage more Americans to dip into retirement savings to avoid foreclosure, or at least remove some of the barriers and penalties to doing so. Whether or not you should use the funds in your 401(k) to save your home from foreclosure is an important decision and one that should not be made quickly, without fully understanding the costs of borrowing money from your retirement savings or discussing your options with a bankruptcy attorney. But it is one of many options for Tampa Bay area homeowners who are struggling with home mortgage payments or who are facing foreclosure.
A Florida foreclosure defense attorney can explain alternatives to tapping into retirement savings to avoid foreclosure, such as pursuing a loan modification, attempting a short sale or considering bankruptcy options. But the HOME Act may offer a new, penalty-free option for those willing to spend 401(k) savings on their home.
Before spending your retirement savings on your home, you should consider:
- Whether you will be able to completely prevent foreclosure or if you will just be delaying it, and
- Whether in the end you will have a home you can afford or have spent your retirement on a home that you cannot keep.
What is the HOME Act?
Fully named the Hardship Outlays to protect Mortgagee Equity Act, the HOME Act would allow penalty-free withdrawals from a 401(k) account to make mortgage payments. The total amount withdrawn could not exceed $50,000 or one-half of the value of your 401(k), whichever is smaller. The withdrawn funds would have to be applied to the mortgage on a primary residence within 120 days of being taken out of the retirement account and all deferred taxes would have to be paid as well.
Many 401(k) plans already allow for ‘hardship’ withdrawals. But, a hardship withdrawal is not without consequences. The amount withdrawn is subject to both state and federal taxes as well as a 10 percent penalty. This typically reduces the amount actually received by 30-40 percent of the amount that was withdrawn. Participants may also be prohibited from contributing to the account for a certain period of time going forward as well.
If the HOME Act passes, existing penalties for hardship withdrawals may be avoided if funds are withdrawn to make mortgage payments. Again, whether the nest is worth sacrificing the nest egg is a very difficult question. Critics of the HOME Act point out that tax debt is much more difficult to get rid of than mortgage debt, so for this Act to be a viable option for struggling homeowners, it should remove both early-withdrawal penalties and taxes on the amounts withdrawn.