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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
Tuesday, Aug 12, 2008
Question: I have a mortgage of 75,800.00 and 147,000.00 in a 401(k) and my husband has 78,000.00 in his 401(k). We are both retiring in 2009 and would like to know if it would be worth taking his 401(k) 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. I know 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 401(k), 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 401(k) if at all possible, as you will probably lose a lot of money in the process.
Here are more details about 401(k) withdrawal rules on Bills.com's Withdrawal Rules page.
You could explore borrowing against your 401(k), with no penalty. Every employer offering a 401(k) plan for its employees decides what withdrawals it will allow from its 401(k) 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 401(k) plan, you should
Here are more details about 401(k) withdrawal rules on Bills.com's Withdrawal Rules page.
You could explore borrowing against your 401(k), with no penalty. Every employer offering a 401(k) plan for its employees decides what withdrawals it will allow from its 401(k) 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 401(k) plan, you should
discuss the plan with your employer or your plan administrator. Some employers allow 401(k) 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 401(k) plans are available on the internet. Here is one site offering practical advice about 401(k) withdrawals: 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
www.bills.com
Many informative resources regarding 401(k) plans are available on the internet. Here is one site offering practical advice about 401(k) withdrawals: 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
www.bills.com
Also, make sure to get a free financial health check-up with Bills IQ!
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1. Posted by Gary Redding on Wednesday 6th May 2009 13:58
I currently have a mortg of 195K and 401k rollover of 350k. My wife and I are drawing SSA of 2537.00 per mo. I also draw 2K from my 401k to make our house payment. 90% of my 401k is in cash and is not drawing enough interest to make up for the withdrawal. We have considerable tax deductions that in 2008 did not pay any taxes. I want to withdraw more from my 401k to pay off my mortgage, how much can I take with out having to pay more in taxes than what I'm paying now on 5.6% mortgage.
2. Posted by Bill on Wednesday 6th May 2009 15:02
That is your money, you can take out a one time lumpsum or spread it out over a period of time. Your plan administrator should be able to tell you more.