Tapping the Retirement Account to Stay Afloat

Just yesterday a friend of mine shared that his wife is going to withdraw $21,000 from her 401K to pay for their 3 year old to go to nursery school for 3 hours a morning next September.  For those reading this outside of Manhattan, the numbers to dial for a coronary are 9-1-1!!!  Yep, $21K for 15 hours of nursery school per week.  Which brings me to this post today at Calculated Risk regarding the surge in 401K withdraws to keep homes from going to foreclosure.

Tanta at CR references Christine Dugas’ USA Today article 401(k)s tapped to save homes.  As the economy struggles despite some saying that we are NOT in a recession (LA Times), more and more people are finding themselves in difficult financial situations and are doing what’s necessary to stay afloat. 

Struggling to save their homes from foreclosure, more Americans are raiding their 401(k) retirement accounts to pay their bills — and getting slammed with taxes and penalties in the process, according to retirement plan administrators.
Rather than borrow money from their 401(k) accounts, which would have to be paid back, a growing number of beleaguered families have been cashing out, plan administrators say.

This is happening even as borrowing from 401(k) accounts remains fairly flat. Fewer still are borrowing from 401(k) plans to buy homes. By contrast, new figures from plan administrators show the number of 401(k) "hardship withdrawals" is up in early 2008 compared with the same period last year.

The main reason? The need to stave off foreclosure or eviction.

Consider Tamara Campbell, who raided her 401(k) after her husband was laid off from his job as an occupational technician, and they fell behind on their mortgage for several months. "If I hadn’t done that, we would have been foreclosed on last year," says Campbell, who lives in a Denver suburb.

No evidence of this happening here in Manhattan…yet.  But if some are finding the need to tap the 401K for education, saving their apartment may be next.  It’s getting ugly out there!

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3 Responses to Tapping the Retirement Account to Stay Afloat

  1. avatar anon says:

    As someone who pays NYC preschool tuition, I feel for your friend. But they should get themselves to a financial adviser – that is folly! To withdraw 401(k) for preschool?

  2. I hear you but I’m also sure you can appreciate the insane behavior of New Yorkers when it comes to their children’s education.

  3. avatar Chrisfs says:

    I may be lynched for this, but if it comes down to choosing between saving your underwater house and saving your 401k. I’d walk and declare bankruptcy if necessary. Creditors can’t touch IRAs and 401k funds in a bankruptcy. Some may call that wrong, but the CEOs of companies aren’t too proud to declare bankruptcy. I don’t see why ordinary people should be forced to throw their retirement on a sword to satisfy someone’s else risky investment (which is was a subprime loan is).

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