Question: My wife and I want to tap into some of our money to buy a second home while interest rates are low and while there are good bargains. We have an account at BUYandHOLD but are reluctant to use it. Both of us also have 401(k) plans where we work. Can we take money out of them?

J. T. Nelson

Answer:

Dear Mr. Nelson,

You are wise to let your account at BUYandHOLD to continue to grow.

There are two ways you can dip into your 401(k): via a financial hardship withdrawal or, via a loan. Of the two, as you will see, a loan is preferable but both come with some serious minuses.

Hardship Withdrawals

The IRS allows financial hardship loans for very narrow and specific reasons. They are:

• To pay for unreimbursed medical expenses, but only for you or your dependents.
  
  
• To prevent foreclosure from your home (or eviction).
  
  
• To buy a primary residence.
  
  
• To pay college tuition (and approved related education costs) for you or a dependent.

But a hardship withdrawal is not an automatic thing. First of all, individual employers can impose tougher restrictions. Or, they can completely bar such withdrawals. Let's examine some of the issues.

The negatives surrounding hardship withdrawals...

• You must pay income tax on the entire amount that you take out.
  
  
• If you are under age 59 ?, you must also pay a 10% early withdrawal penalty, with rare exceptions.
  
  
• You'll be asked personal questions about why you need the money. Many employers insist that you prove you've exhausted all other sources of money. In your case, your plan administrator might insist that you use your BUYandHOLD account to meet your financial needs.
  
  
• You will be giving up part of a key asset. Federal law protects your 401(k) from creditors. So if you were to file for personal bankruptcy or go into foreclosure, your 401(k) would be safe.

Finally, you're obviously depleting money specifically set aside for your retirement.

Now that we've laid out the pertinent details about a hardship withdrawal, let's look at a loan.

401(k) Loans

Most plans allow employees to borrow up to $50,000 or 50% of the amount invested in the plan, whichever is less. And the interest rate is low, compared with other types of loans -- typically 1 or 2 percentage points above prime. And, you'll have five years in which to pay it back.

Negatives of 401(k) loans...

Again, you're obviously depleting money for your retirement. The growth of your 401(k) is directly hampered by the amount you take out.

Equally important is the fact that if you leave your job or are fired, you must repay the loan, and fairly quickly. Most plans insist upon repayment within 30 to 90 days after your final day of work.

If you don't repay the money you will be hit with taxes on the outstanding dollar amount.

For Further Information

You'll find a wealth of material at: www.401khelpcenter.com.

Good luck!