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Use of 401(K) loans on the rise in shaky economy

The Employee Benefit Research Institute tracks how many American workers take out loans against their 401(k) plans. The organization has been tracking the data since 1996. In 2009, the group says more than 20 percent of American workers borrowed against their retirement accounts. They have not issued numbers for 2010, however, a number of experts who handle 401(k) plans for large companies say a growing number of workers are tapping into their retirement accounts in today's tough economy.

Some experts say the upward trend is associated with the overall state of the economy. Consumers saddled with high credit card debt or medical bills are tempted to pay off the high interest debt through 401(k) loans in an effort to save money. While in certain circumstances, the idea may offer a pathway to debt relief, but the vehicle does carry risk.

Each 401(k) plan has its own rules for how a loan must be paid back. Many have strict timelines in the event of a job change or layoff. The difficulty, and risk, becomes apparent if the loan is not timely paid off. Missing the payoff date can result in tax consequences, including IRS penalty fees.

It is important to note that every person's financial situation is unique. It is equally important to note that the Bankruptcy Code and Ohio law offer specified exemptions. Qualified retirement accounts, such as most 401(k) plans, have a specified amount that is exempt from a bankruptcy proceeding. Most Cincinnati residents do not have balances in their 401(k) high enough to place the funds at risk to the bankruptcy estate. That is, most funds in the account are exempt from the bankruptcy.

An experienced Cincinnati bankruptcy attorney can help assess an individual person's debt load and overall assets and help those suffering from financial distress to make informed decisions on how to find relief from high debt loads.

Source: The Kansas City Star, "Workers increasingly raid 401(k)s for short-term cash," Mark Davis July 24, 2011

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