Financial Crunch Forces Some To Borrow From 401(k)

SAN FRANCISCO (CBS 5) ― Cashing out of the 401k is a desperate measure many are taking to prevent foreclosure. Large retirement investment firms are reporting 20-percent increases in people raiding their retirement accounts. CBS Early Show Financial Adviser Ray Martin calls it a bad idea.

"It's not reversible. You can't put it back. You lose a huge amount in taxes and penalties," said Martin.

Let's say you withdraw $10,000 from your 401k account.
-Federal and state taxes will eat up 30% or $3,000 of that income.
-If you are under the age of 60, there's a 10% penalty for cashing out early.
-So the remaining amount available is only $6,000.

Donna Keener did dip into her 401k while she works out a new loan modification. Her mortgage adjusted up doubling her monthly payments.

Her house is worth about 30% less than what she now owes on it, so selling it is not an option. She offset the pain of cashing out part of her 401k by investing some of the cash into a CD and paying bills with the rest.

She's working three jobs even counseling others on how to navigate the process of loan modifications. So far, she's had little luck working out a payment plan with her lender.

"He said why should we give you money and help you when we can take that money and invest in the stock market? I said, you have got to be kidding me. It hurts my heart that banks are not willing to work with us to keep our homes."

She says she has always been on time with payments and does not want a handout. She just wants a reasonable loan.

The more time that passes, the closer her home comes to foreclosure.

She is considering whether to turn back to her 401k, this time for a loan.

"It is a possible but you're taking on more and you have to pay it back and only have so many years to pay it back. If my husband lost his job what happens to that? How will we pay that back?"

Most plans let you borrow half of your savings or up to $50,000 from your 401k plan. If you leave your employer for any reason, you need to pay that money back immediately or face hefty income taxes and a penalty.

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