I have been putting money into my 401k and traditional IRA every year
and I am wondering if it is a mistake.

The first issue is purchasing a home.  I know that I can withdraw
$10,000 from my IRA (and pay the tax on it) to pay for a home,
however, that is not nearly enough for a down payment.  If I could
somehow use all of the money in my 401k and IRA, that would be
sufficient.  Is there any way to somehow use that money toward my home
purchase so that I will not be stuck paying for PMI?

Second, is there some way that I can access this money for general
purposes such as starting a business?  I know that I cannot invest
money from an IRA in a business that I own.  Is there any way I can do
this?

Finally, given that I cannot really use the money for a home purchase
or to start a business, the tax benefits do not worth the missed
opportunities.  Is there any good reason that I should continue
putting money into retirement accounts instead of investing it
elsewhere?

Dear Drew,

If you're going to start a business, and you plan for it to make a
profit, open a solo 401(k) for yourself and your wife. If your company
permits it,
you may transfer your present 401(k) balance to your IRA.

Use the $10,000 towards your down payment, then transfer the rest of your
IRA balances over to each of your new solo 401(k)s. Once you've transfered
the money, you may borrow up to $50,000 or 50% of the balance (whichever
is lower). You may use the borrowed money towards your home, your business,
or whatever.

You'll be paying it back to yourself. And you will pay no taxes in the
meantime on the money you borrow.

Naturally, if you're staying with your existing job long-term, you may
simply borrow the money from your present 401(k). But if you leave your
job, or get fired or laid off - you'll have to come up with the full 
balance due. Otherwise, you'll be subject to taxes, etc. 

That's why the personal, solo 401(k)is preferable. Since it's your own
business, you're not apt to close it or fire yourself...

As to your question about why to continue to fund your retirement
plan when you have better uses for your money? 

That's a good question. Most people with jobs don't have a better use
for the money. Not when you take into account the tax break for the
contribution, the employer's matching and the tax-free growth of the money.

But if you have a solid, profitable use for the money, like a home that
will appreciate, or a business that already has assured sources of income - 
perhaps you're better off using the money to invest in those options. 

But as soon as you can afford it, build your retirement funds again. 
In the long run, it's a good idea to segregate that money so you have it
to supplement your Social Security benefits (if any) when you retire.

Best wishes

Your TaxMama-ga

You could join the military and get a VA mortgage. No PMI, often no
down payment, and you are serving your country-- something fewer than
ten percent of the citizenry do. You might even like it. You can
retire in as few as 20 years.

If your company's 401k includes a matching amount and you stop
contributing, you are throwing away free money.

You can borrow against the 401k (and 403b) but not the IRA. This is
touchy, 'cuz if you leave your employer the loan backed by the 401k is
subject to being due immediately. Some companies have special
procedures for this; check with yours. Generally, the max you can
borrow is $50,000 or 50% of your account balance, whichever is LESS.

If you rollover your IRA, you will be issued the funds and get 60 days
to place them in a qualified IRA. Failure to do so in 60 days hits you
with all the penalties. However, you've got use of your IRA money for
59 days!

If you become totally disabled, you can withdraw it without penalty,
so you have that going for you.

The Courts can require money be paid out to someone else in a Domestic
Relations Order. Wow, you've got divorce on your side. Unfortunately,
it is working for someone else.

If you can't do what you want to do on your budget, which should
include retirement savings, then you need to rework other parts of
your budget. Cancel the cable, stop eating out so often (that goes for
lunch, too), decide if you really need a newer car or just want one,
cut out the ATM fees by using fee-free ones, get cheap internet, stay
away from Starbucks as if it was the Plague, etc. If you can't shave
15% from your expenses, you ain't trying.

Drew --

Many 401k's have provisions that allow borrowing:

MSNMoney
"Warning: 401(k) loans are hazardous to your wealth" (Applegarth, undated)
http://moneycentral.msn.com/articles/retire/basics/4714.asp

Here is a list of ways that you can withdraw from an IRA.  You might
be able to cost-shift the payment of medical expenses or medical
insurance:

About.com
"Eight Ways to Avoid the 10% Early Withdrawal Fee on Your IRA" (Kennon, undated)
http://beginnersinvest.about.com/cs/iras/a/aairafees.htm

Best regards,

Omnivorous-GA