what kinds of penalties will I get if I use my 407K to pay off my house?

Answer 1

You'll be subject to a 10% IRS penalty for early withdrawal from your qualified retirement plan, plus whatever penalties the provider of your plan has.

Since interest on a mortgage is deductible, why not continue to carry the mortgage? I advise against most other debt, but a mortgage, under the current tax laws, still makes sense for maximizing your dollars.

Good question!

Answer 2

You will pay (in penalties and taxes) around 50% of your withdrawal. The exact amount is calculated by adding the statutory penalty of 10% plus your marginal tax rate at the taxable income which includes your total withdrawal.

As an example:

Withdrawn: $20,000

Penalty $ 2,000

Taxes

Federal @28% 5,600
State est 5% 1,000

Total Penalty and Tax 8,600

Net Withdrawal 11,400


This makes the withdrawal very expensive. It is made moreso by using the funds to pay off a tax deductable debt (mortgage).

The net after-tax effect makes this idea inadvisable!

Answer 3

I think that you mean a 401(k). The main penalty is an immediate 10% penalty on top of the regular taxes. You also have to pay state and federal income taxes on the amount that you take out of the 401(k) as if it was ordinary income, and it is added to your income for the year, vaulting you into a higher tax bracket.

Suppose that you have $50,000 and use that to pay off your house, and you pay state and federal taxes at a marginal rate of 30%. Add the 10% penalty, and you only have $30,000 available to pay off your house.

Here's the math: (50,000 X (1-[0.3+0.1]) = 50,000 X 0.6= $30,000.

Answer 4

why the rush to pay off your house, you can deduct the interest you pay on your mortgage from your taxes.....saving for retirement should be paramount, wouldn't tap into that 401k unless you had too....check with your plan administrator for the penalty info