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401(k) Mortgage Payments

Save for retirement or pay mortgage?

Federal legislation would let homeowners use 401(k) to make mortgage payments.

Should homeowners be allowed to use their retirement savings to make their mortgage payment without being penalized by the federal government?

That's the idea behind a bill, pending in Congress, that would allow penalty-free distributions from a 401(k) account for the purpose of making mortgage payments.

Specifically, the "Hardship Outlays To Protect Mortgagee Equity Act of 2011," also known as the "HOME Act," would amend the federal tax code to waive the 10 percent penalty on early withdrawals from qualified retirement accounts if the money were put toward a mortgage on a principal residence within 120 days.

The distributions would be limited to half the account's value and subject to a $50,000 lifetime cap. The homeowner would have to pay deferred income tax. Only the penalty would be waived.

The HOME Act has been introduced in both the U.S. Senate and House of Representatives. Like all legislation, it faces an uncertain future.

Proponents say waiving the penalty would:

  • help homeowners avoid foreclosure,
  • help homeowners refinance to lower their interest rate or payment,
  • help stabilize housing markets and home values, and
  • reduce the number of vacant and abandoned homes in areas that have been hard hit by foreclosures.

The Virginia Association of REALTORS® agrees and supports the HOME Act.

Click here to learn about other issues affecting homeowners in Virginia.