Borrow from a Retirement Plan

If you have an IRA or 401(k), you may be considering taking a withdrawal from it to prevent your foreclosure.  If you do so, you will lose a big chunk of the withdrawal to taxes and penalties. Not only will you be penalized 10% of the money you withdraw, but you will also have to report the full amount of the withdrawal as taxable income for the year, and pay income taxes on that amount.
A much better option is to take a loan from your retirement plan, rather than a disbursement.  As long as you have a job, you can generally get a loan from your employer’s 401(k) plan.  If you leave or lose your job, you can no longer keep the loan or borrow from the plan. Therefore, you may be thinking that you are unable to take advantage of a loan if you are unemployed.
However, under new tax laws that went in to effect in 2002, if you are self-employed, you can start your own 401k plan. Any business that has no employees qualifies. The paperwork to set up a Self-Employed 401(k) is easy, and you can transfer any balances from your other IRAs, 401(k)s, or SEPs into your Self-Employed 401(k).  Most of these plans allow you to borrow up to 50% of your account balance up to $50,000, at a reasonable interest rate (near prime).  You can set up this plan whether your business is part-time or full-time, and most plans cost less than $200/yr to maintain.
If you’re thinking, “But I’m not self-employed!” … relax.  It’s easy to start a home-based business, and in fact, there are significant tax advantages to doing so. Remember you don’t have to actually make money to have a “home-based business” – at least not every year. You can start a business selling on eBay, doing affiliate marketing on the Internet, washing dogs, whatever!  Do you have a hobby that you really enjoy?  Whether it is collecting stamps or carpentry, painting or paintball, find a way to make it into a business! Talk to an accountant to get the details. (Remember, you can pay them out of the money you borrow, too.)
A word of warning – if you fail to make the loan payments, you’ll trigger the same penalties and consequences as if you had just taken the disbursement.  My advice is borrow enough to give yourself a little cushion so you can make sure to make those payments – remember 100% of them (including the interest!) go back to your plan.