The future will be bleak

Uh-oh. This article discusses how people are borrowing from their 401Ks to stop the foreclosure process. First people were borrowing against their equity to make mortgage payment - stated yesterday as more of a fantasy money but taking from your 401K is directly taking from your future and the consequences in todays terms are big. Is it really that important to live nice today? I remember growing up in the 80s and hearing about the elderly working poor eating cat and dog food. I don't know if that was urban legend or real but it made even teenagers a little concerned about our futures.

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.

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

The 401(k) withdrawals are rising mainly because people such as Campbell and her husband want to save their homes. Merrill Lynch found that the primary reason for the rise in hardship withdrawals was to prevent foreclosure or eviction, based on its sampling of applications filed in January.

... For workers, the consequences can be severe. About 85% of employers bar employees from making 401(k) contributions for six months after taking a hardship withdrawal, says Pamela Hess, director of retirement research at Hewitt Associates. (HEW) Worse, employees who pull money out of tax-deferred 401(k) plans before age 591/2 generally must pay a 10% penalty on top of the taxes owed.

A 401(k) loan imposes no such punishment. "But let's face it: If your problem is paying bills, and if you take out a loan, then you just add another bill to pay," says Nevin Adams of PlanSponsor.com, which monitors the 401(k) industry.

As Campbell considers whether to make another withdrawal, she notes, "It's not the kind of thing you want to use your 401(k) for. And if I keep doing this, I'm not going to have any retirement savings."

A few months ago I saw a post on one board that made a prediction that 401Ks and IRA would be altered to allow for mortgage payments to be drawn against the monies without consequences. I think to stave off huge foreclosure rates this would work better and be more publicly palpable than having banks write down equity levels on underwater mortgages. But this will still have dire consequences down the road.

Nevin Adams line about just another bill to pay was also true of the Refi-cash outs and HELOC's. People would run up credit card bills and buy expensive cars and put them on a 30-year payment plan. While the monthly payments seem lower at the time, the debt is still real and in many cases overwhelming.