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Ryan S | Does it makes sense to withdrawal from your 401K to pay your mortgage? |
I'm a 30 year old male with $70 000 in ten mutual funds in a 401K and have a $30 000 mortgage (1 of 2). I'm paying 8.25% on my mortgage and this last quarter lost 3% on my 401K, an anomoly. Still, does it make sense to pay an early withdrawal fee and pay off my mortgage? |
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zygote222
 |
No, premature withdrawals from a 401k are almost always a bad idea. The tax laws are an almost impossible hurdle to overcome. You would have to pay federal and state taxes plus a 10% penalty on the withdrawal. The exact amount you'll lose to taxes and penalties depends on your individual situation, but it's fairly certain to be at least 25% of the amount you withdraw and very possibly over 40%. In addition you lose any profits you would make by leaving the money in your 401k.
So you are starting with a 25%-40% loss on your withdrawal and trying to find a use for the money that makes it all worthwhile. Saving 8.25% interest on a mortgage just doesn't make up for the huge hit you're taking upfront.
Circumstances may force you to take a withdrawal, for example if you're likely to lose your house to foreclosure. But, if you aren't forced to withdraw from the 401k, you are almost certain to be better off leaving it alone. |
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Doctor Deth
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if you're still working for the company your 401k is with, you can't withdraw money - I lost over 10% in the last 3 months - even if you left the company where you could then withdraw your money or roll it over to an IRA - you would lose 30-40% of your money to tax and 10% early withdrawal penalty - that makes no sense to pay off a small mortgage |
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kevin h
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Without looking over all the numbers, probably not. Your mortgage is a huge taxshelter. If that is the only debt that you have, I wouldn't do it. I would just sit tight and try to pay an extra 100 a month on principal only, and that will cut years off your mortgage. The money in your 401k will grow faster if there is more in it. Despit your losses, you are still 20-35 years from retirement, so, I would leave that be, and just make extra payments. Also, see if you can pay your mortgage every 2 weeks instead of once a month. You make 2 payments in a month at half the regular payment, and end up making 13 months worth of payments in a year, so it is worth it. Hope that helps some. |
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sarahgarlough
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NO!!! You will have so many penalty's that it would make your head spin. I know, I did what you are thinking and wished i hadn't.
You can change how your 401k is invested, so maybe you won't lose so much.
Good luck |
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William H
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You will need to take out at least $50,000 of your retirement plan to pay off your $30,000 mortgage because the effect of taxes of 40% (I am making an assumption of 25% federal tax 5% state and 10% penalty for early withdraw.)
This in and of itself should scare you away from taking money out of your retirement account. If that is not enough, then think about the money you will have in 30 years when you retire by not taking the money out.
No, do not take money out of your retirement account to pay off a mortgage. |
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chelscutie
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ABSOLUTELY NOT!! You should never withdraw from your 401 under ANY circumstance!! You lose money and it is a horrible idea!! |
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digdowndeepnseattle
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it's actually pretty simple...What you need to do is calculate how much your 401k would lose if you took out the $45k that you would need to take to pay off the mortgage. Assuming it would stay invested and earn 7.5% per year, your 401k would be missing out on $702,000. Then you compare that to the interest that you are saving by paying it down early PLUS the amount that you would earn if you invested the mortgage payments and earned 7.5% year. You don't provide that level of detail but I'll toss out numbers and you can judge for yourself. If we assume that you borrowed $35,000 and have a 30 year not. You have been paying for 10 years to get it down to $30k. You'd have about $32k in interest savings if you paid it off now. In addition you'd reap the benefits of being able to invest about $275 a month for the next 20 years. That amount carried out until age 67 equals a bout $525,000. The two savings together = $557k or a $145k loss when compared to the 700k missing earnings on your 401k. This loss gets compounded if you fail to invest that mortgage payment....
Don't take into consideration the appreciation of the house...you're getting that anyways whether you pay if off now or not.
Bottom line is that you're almost always better off keeping your cash invested and working for you. If you were paying 9 or 10% on the mortgage then I'd have to rethink it...but at 8%? Better for you to keep the lump sum invested then invest a much smaller monthly payment. |
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mikeeyman
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Probably not... You will have to pay federal tax and state tax (depending if your state has income tax) and a 10% penalty on top of that....
Expect to send atleast 40% of your withdrawal to the government. |
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Greg S
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You can take out a loan against your 401k, and I guarantee you will get a better interest rate than 8.25%, plus you are paying back the money to yourself |
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bud68
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No it makes NO sense at all. |
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smancini3
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The penalty is about 10% for early withdrawal.. Don't do it. |
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Steve
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Under Federal laws, you are only allowed to withdraw money out of your 401K to purchase your first home. Since you say this is 1 of 2 mortgages, this is not your first home, or it has been refinanced. Either way you will not be allowed to take the money out without having to pay sever penalties. It would not make any sense to me for you to do this. Especially with the way the stock market is right now. Good Luck to you! |
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jl
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I don't think so. Unless your gonna be dead by 65. You might want to consider borrowing against your 401k, and then the interest you pay will be to yourself instead. I'm not sure how your tax deduction on your mortgage changes when you do that though, anybody else know??? |
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stratus_31
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Taking into consideration you are only 30 years old and I'm assuming no other debt.......I would pay it off......but I do have (2) questions first.
1). Why is interest rate so high?
2). How much is the penalty for paying the mortgage off early?
UPDATE:
Also, how many years are left to pay on this mortgage and what are the monthly payments? |
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Picky1
 |
Is it necessary? Do you really want to pay it off? There are more perks than just financially. Will it relieve a nice amount of stress from your life? The burden of having the mortgage will be lifted, and can bring mental peace.
You're young. You'll still have $40k in the 401k. You aren't retiring soon.
Honestly, if I were you, I would do it. I would rather have the mortgage gone and make up the money over time than live with the bills. |
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