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California homeowners with mortgage-related headaches will get some relief under a new bill proposed by State Assemblymember Chris Holden (D-Pasadena). AB 132 would waive the state penalties on early withdrawals from retirement accounts when the funds are used to help stabilize mortgage payments.
As more and more homeowners struggle to pay their mortgages or watch as their home values plunge, they are turning to early distributions from their retirement accounts. But that can trigger severe tax penalties if the borrower is less than 59 ½ years of age. There is a 10% federal tax penalty and an additional 2.5% state penalty for early withdrawals.
“These people are being penalized for trying to do the right thing and save their homes,” explained Assemblymember Holden. “With several mortgage lenders acknowledging abuses, it’s time to give homeowners a break. In addition to helping these people stay in their homes, we’re also helping restore stability to our communities and avoid the blight associated with foreclosures.”
Under Holden’s AB 132, eligible homeowners could avoid state tax penalties on up to $6,000 taken from their retirement accounts when they use them to pay their mortgage. The penalty is also waived as part of a home loan modification. In addition, individuals must agree to receive financial counseling from a HUD-approved counseling agency prior to taking the distribution.
“I’m hoping that this bill will allow more homeowners to avoid foreclosure. The added funds may help stabilize homeowners for a month or two until they can refinance or sell. Although foreclosure rates across the state are down, California still has the nation’s second-highest foreclosure activity,” added Holden.