The Financial Industry Regulatory Authority (FINRA)has issued a new Investor Alert to highlight the pitfalls of various “quick cash” programs becoming more prevalent in times of rising fuel and food costs, declining and volatile housing markets and the tightening credit crunch. The Alert addresses Internal Revenue Code Section 72(t) plans and 401(k) debit cards which both permit premature withdrawals from 401(k) plan accounts. The Alert warns that 72(t) withdrawals can use an unrealistic rate of return and require imprudent rates of withdrawal each year, while 401(k) debit card withdrawals could result in increased tax liabilities including penalties, lost opportunity costs and making available to creditors assets that are otherwise creditor-proof. Also addressed are Life Settlements or Senior Settlements which allow an insured to cash out by selling their life insurance policy to a third party for more than the policy’s cash surrender value but less than the death benefit, and Reverse Mortgages which allow homeowners to cash the equity out of their homes by receiving a lump sum and adding the interest to the principal (a “rising debt” loan). Life Settlements and Reverse Mortgages could both result in the loss of valuable state or federal benefits such as Medicaid for investors or their spouses. Life Settlements expose a great deal of personal health information to third-party purchasers, and Reverse Mortgages could result in a loss of homestead exclusions and other home equity protection against creditors or result in no property left to bequeath to heirs.

http://www.finra.org/InvestorInformation/InvestorAlerts/RetirementAccounts/WeatheringToughFinancialTimes-TheLong-termCostsofQuickCash/P038822