BILL'S 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 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. A great resource for 401(k) information is the IRS Web site. See the IRS 401(k) Resource Guide to get started. The IRS also offers a Frequently Asked Questions section about 401k plans.
I hope this information helps you Find. Learn & Save.
Best,
Bill
Austin, TX | June 02, 2011
June 02, 2011
With 7 years remaining on your 15-year, 4.875% loan, your interest expense becomes a much smaller fraction of your monthly payment. My guess is the loan's original balance was about $120,000, and that $950 goes to principal and interest, with the rest going for taxes and possibly fire insurance. If I am in the ballpark, you have paid ~$33,700 in interest to date. At this rate, you will pay another ~$15,500 in interest over the next 7 years. No doubt your numbers differ slightly, but my point is the same &mdash your loan will cost you from $15,000 to $16,000 in interest from this point forward. So that means it is smart to pay the loan now, right? Maybe not for three reasons.
- What is your rate of return on your IRA? If it is near or above 4.875%, then there is no financial advantage to liquidate the IRA. Why? The relative rate of return in the mortgage and the IRA investing are a wash, but Congress gives homeowners with a mortgage a tax break for the interest expense.
- What is your backup income should your present job end? If you liquidate your IRA today, and your contract expires next week, how will you support yourself? If you are eligible for unemployment (which you may not be as a contractor) how much will your state pay you? If you are not eligible for unemployment, what is your source of income?
- How will you pay the 10% penalty tax and the increase in your income taxes next year?
If your income was more certain, or you had another source of savings, then retiring the loan would be an easier decision. However, given your uncertain income, I would caution you to think twice before exhausting all of your savings to achieve debt freedom.
January 11, 2010
January 11, 2010
May 06, 2009
May 06, 2009
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