Can Pension Cash Save A Home?

At a time when a lot of households are in deep financial trouble, the U.S. is awash in cash. The sums available are staggering, trillions of dollars, including a large number of dollars in pension accounts which in some cases can be used to buy houses, purchase investment property and save homes from foreclosure.

So how much cash is out there?

About 25 percent of all existing home sales are now made for cash buyers, according to the National Association of Realtors.

When people refinance, they’re more and more paying down debt and not adding to it: Freddie Mac says in the second quarter that 22 percent of all homeowners who refinanced a first-lien home mortgage lowered their principal balance by paying-in additional money, a record percentage.

Robert Andrews, a senior analyst with IBISWorld.com, a business intelligence service, said pension system assets rose 13.5 percent since 2009 and now total $9.0 trillion. “During this period,” said Andrews, “industry assets increased as the financial markets rebounded, with the private sector gaining about 16.2 percent in total asset value.”

Private pension funds, said Andrews, “account for about 58.5 percent (or $5.7 trillion) of all US pension plan assets. In comparison, state and local government funds are estimated to account for about 28.5 percent, while the federal government’s programs account for about 13.0 percent.”

According to the Federal Reserve, IRA and Keogh accounts now hold $577 billion. You look at these numbers and wonder: Could these dollars impact the foreclosure crisis?

Pensions
Until the 1930s the idea of retirement was a fantasy. In 1935 the Social Security system was established, but with a unique barrier: Most people would not live long enough to benefit from the program. As the Social Security Administration explains: “life expectancy at birth in 1930 was indeed only 58 for men and 62 for women, and the retirement age was 65.” In other words, as the system was originally designed many workers would pay for benefits they were unlikely to ever receive.

Today, retirement is the norm, life expectancy has reached 77.9 years and millions of people have a private or corporate pension in addition to Social Security.

Pension money has traditionally been hard to extract from private retirement accounts because such dollars are intended for use in old age when other income may not be available.

Depending on the plan, it may not be possible to withdraw funds. With some plans the money taken out can be taxed as regular income. For those under age 59.5 there can be a 10 percent penalty in certain cases. And if you’re facing bankruptcy you may be better off keeping the money in a pension account where it will generally be off-limits to creditors.

Despite such barriers, private pension dollars can sometimes be used to buy real estate — or stave off foreclosure.

“Withdrawals from retirement accounts were unattractive in the past,” said James J. Saccacio, chief executive officer at RealtyTrac.com. “Today, however, we have a situation where many accounts are earning close to zero and principal balances are declining. At the same time, home prices are being discounted in many markets, interest rates are near historic lows and some households are facing foreclosure. In such circumstances, it may make sense to review retirement account options to see how such funds can be best employed.”

Hardship
For those facing foreclosure the IRS says 401(K) plans, 403(b) plans, and 457(b) plans may permit hardship distributions without penalty, however, such plans are not required to allow hardship withdrawals.

What’s a hardship? The IRS says that with a 401(K) plan a hardship may include “payments necessary to prevent eviction from, or foreclosure on, a principal residence.” For a 457(b) plan, the government says money may be withdrawn for an “unforeseeable emergency” such as imminent foreclosure or eviction. As to a 403(b), 403bWise.com says hardship withdrawals may be allowed to prevent “eviction or foreclosure on your primary residence.”

The situation with IRAs is different.

“There is generally no limit on when an IRA owner may take a distribution from his or her IRA,” said the IRS, “although there may be unfavorable tax consequences, such as an additional tax on early distributions. However, certain distributions from an IRA that are used for expenses similar to those that may be eligible for hardship distributions from a retirement plan are exempt from the additional tax on early distributions. Specifically, a distribution from an IRA for higher education expenses or to finance a first-time home purchase is exempt from the early distribution tax.”

In other words, you can readily use IRA money without penalty to purchase a first home or pay college tuition, but not to prevent a foreclosure or buy an investment property.

Self-Lending
In some situations it may be possible to borrow from your own pension fund to buy property or prevent foreclosure. For instance, some 401(K) plans allow loans equal to as much $50,000. The attraction of such arrangements is that the money is available without taxes (because the funds are in the form of a loan and not a withdrawal), there’s no penalty for early withdrawal, and borrowers can take five years and sometimes longer to repay.

For more information, speak with plan advisers, fee-only financial planners and attorneys who specialize in elder law. Be sure to ask about taxes, penalties, bankruptcy issues, and the net amount you will receive.
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Peter G. Miller is syndicated in more than 100 newspapers and operates the consumer real estate site, OurBroker.com.

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