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Advice on Withdrawing From a 401K to pay off Mortgage - The Bills.com Blog
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Advice on Withdrawing From a 401K to pay off Mortgage
Question: I have a mortgage of 75,800.00 and 147,000.00 in a 401K and my husband has 78,000.00 in his 401k. We are both retiring in 2009 and would like to know if it would be worth taking his 401k and paying off our house. Both of us will be receiving a pension, which averages around 1,033.00 short of what we would need to live like we are. Iknow there is a penalty for withdrawing too soon. But would it not average out the same by saving on interest paid?
Answer: If you are older than 59 1/2 you can make a withdrawal without a penalty. As you state in your question that you are about to retire next year, I am guessing you are pretty close to that age. So I'd suggest that you wait a while.
But, if you are not 59 1/2 yet, you will be required to pay taxes at your regular income tax rate on funds you withdraw from your 401k, plus a 10% penalty for the early withdrawal. This could mean that if you withdraw $10,000, you may only end up with $6,000 (or less) in your pocket, so do the math before you decide to go this route.
Some withdrawals can be made without penalty, but these usually require a true financial hardship; mortgage payoff does not qualify
for a penalty free withdrawal. Clearly, you should avoid withdrawing funds from your 401k if at all possible, as you will probably lose a lot of money in the process.
Here are more details about 401K withdrawal rules on Bills.com .
You could explore borrowing against your 401k, with no penalty. Every employer offering a 401k plan for its employees decides what withdrawals it will allow from its 401k plan, and under what circumstances. In fact, some employers do not allow withdrawals at all, except under very limited circumstances. To find out the rules regarding withdrawals from your 401k plan, you should discuss the plan with your employer or your plan administrator. Some employers allow 401k participants to borrow money against their plan account rather than
withdrawing funds from the account. If allowed by your employer, this type of loan can be good way to utilizing the funds in your account without paying tax penalties for a withdrawal. Again, ask your employer if it offers this type of loan option to employees.
Many informative resources regarding 401k plans are available on the internet. Here is one site offering practical advice about 401K withdrawals: www.401khelpcenter.com .
The IRS also offers a “Frequently Asked Questions” section about 401k plans.
I hope the information I have provided helps you Find. Learn. Save.
Best,
Bill
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