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Good Money after Bad — Using Retirement Funds to Save an Underwater House

Buying a home is one of the proudest days in most people’s lives. Letting go of that home when things get tough can be a very difficult thing to do. But when the housing market dropped and the value of many homes plummeted, many people in the United States found themselves trapped in mortgages that they simply could not afford. In this situation, it can be tempting to use all the resources at your disposal to try and bail out your sinking mortgage. This can include tax deferred retirement savings like individual retirement accounts (IRAs) and 401(k)s.

There are several reasons why this is often a bad idea. First, you are going to have to retire some day and, depending on your age, it may be very difficult to restore your depleted savings before reaching retirement age. Second, most tax deferred retirement funds impose substantial penalties for early withdrawal, meaning that you lose up to 20 percent of your retirement savings simply by accessing the money early. Third, you have other alternatives that allow you to avoid these consequences.

Many mortgage lenders are willing to negotiate with borrowers who are struggling with home payments. Alternatively, some lenders may consent to a short sale which lets you to get out of the mortgage contract while allowing the lender to recoup some of its investment. Finally, bankruptcy can be an option. Many people do not realize that many retirement assets — including pension plans, deferred compensation plans and tax deferred accounts — are often exempt from creditors and the bankruptcy Trustee.

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