Bills.com > Mortgage > Mortgage Questions > Advice on Withdrawing From a 401K to pay off Mortgage
Question:
JAN 18, 2012

Advice on Withdrawing From a 401K to pay off Mortgage

I have a mortgage of 75,800.00 and 147,000.00 in a 401(k). Should I withdraw from the 401(k) to pay off my mortgage and save m

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Bill's Answer: Bills.com Resident Expert

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

Bills.com

Comments (6)


Rich C.
Austin, TX  |  June 02, 2011
I am 52, a contract employee (about $1950/mo) with not such a great outlook on full-time future employment (I've sent out countless resumes to no avail... I think age discrimination is alive and well). I also own a home on a 15-yr/4.875% mortgage, with about 7 years remainging (about $79,000) and a monthly mortgage payment (with escrow) at $1479/mo., plus regular monthly living expenses. I have to withdraw about $500/mo from my savings to meet my monthly expenses, and have about $79,000 remaining in my IRA. I'd like to know if it would be wise for me to withdraw the IRA and payoff my mortgage and take the tax hit. I know it would be based on my income for the year withdrawn (no idea when this job will end), plus 1%, but I want to reduce my monthly expenses and stop worrying so much about paying on my house, etc. I figure with the tax hit and interest I still need to pay until the mortgae is paid out, it would probably come out close to even but at least the house will be paid and I don't have to worry too much about salaries. Am I looking at this all wrong? Please help me on this one. Rich
Bills.com
June 02, 2011
I understand the emotion-based desire to a) own a home free-and-clear, and b) not worry about the monthly payment. Both reasons resonate strongly with me, and I would guess many Bills.com readers, too. However, I suggest looking at this situation dispassionately.

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.

  1. 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.
  2. 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?
  3. 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.

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Bills.com
January 11, 2010
I really dislike it when financial gurus say homeowner can save $X over the life of a mortgage by paying the balance early without discussing relative rates of return and the tax deduction homeowners get for a mortgage interest expense. Yes, paying less in interest expenses is A Good Thing, but not if you can put the money you use to pay off the mortgage early to more productive use. If I understand your question correctly, you have a fixed mortgage at rate of 5%. If so, the missing piece in this puzzle is the rate of return on your 401(k). Look at the relative rate of return on the 401(k) vs. the interest rate on the mortgage, keeping mind that Uncle Sam is underwriting part of your mortgage interest expense.
Richard D.
January 11, 2010
Hi, Bill am I glad to have discovered your Bills.com. I just recently sent Suze Orman the same question, God Bless her and You as well for all the well needed advise in these times of FINANCIAL DEPRESSION....I am 60 in April 2010 Would like to payoff home using 401k. Withdrawal taxes $23.6k /Savings on homes interest$27k... Loan: 15 yrs. Conventional, 5% Fixed Last payment 10/2018.
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Bills.com
May 06, 2009
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.
Gary R.
May 06, 2009
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.
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