I owe $105,000 in my mortgage and have $260,000 in my 401k. Should I take money from my 401k to pay my mortgag

Answer 1

In most cases absolutely NOT.

Reason #1
It would be very expensive. Money withdrawn from your 401K is instantly taxable at your highest tax rate. For most people that's 28% federal plus your state income taxes. If you are under 59 1/2, you'll pay another 10% penalty. That's a lot higher than the interest rate on your mortgage.

Reason #2 -
If you are still with the same employer, you can't just withdraw the money. You can borrow from some 401K plans, it depends on whether or not your employer allows it, but..... this is a really bad idea too, because in addition to interest, if you leave the employer you MUST pay it back immediately or you suffer the same tax and penalties as above.

Reason #3 -
Because your mortgage is at a low rate that should be lower than the rate of return on your investments within your 401K. In other words, the money in your savings is likely to grow a lot faster than the interest you will pay on your mortgage, plus the mortgage interest is tax deductable so it reduces your current income taxes.

Reason #4 -

Time is your best friend on investments because the return on it gets to grow exponentially every year. In other words, if your $260K grew 10% this year and every year, you'd have $286K next year and $314K the year after and so on and so on. Each year the dollar amount that gets added to your account grows. (this rough example doesn't include more money you add to the account). If you took $150K out (and you'd really have to drain nearly the entire account to cover the tax and penalty loss), you'd only have $110K this year left to grow. So instead of making $26K this year, you'd only make $11K, and each year that deficit would grow larger.

Reason 5 -
Your house is a leverage investment. Really, since you have a mortgage, even though real estate typically rises in value less than stocks, the rate of return on the actual money invested, is really much bigger than you think.

For example, let's say you have $20K cash invested (down payment, improvements, and monthly payments) so far and you paid $170K for your house a year ago. If real estate in your area rises an average of 5% a year, then your house is worth aproximately $178, 500 now. So..while 5% doesn't sound like a big return, and it wouldn't be had you paid cash for the house, what you have actually realized is an $8,500 gain on the $20K you have already invested. That's a real return of of 42.3%! If you take into account what you've saved in income taxes, the return is even better.

So..anyway you look at it, paying off your mortgage with your 401K would cost you a ton of money.

Oh..and worst case scenario. You are suddenly unable to work the rest of your life and all you have is your house and your 401K, should you do it then? Nope. Better to withdraw the payment for the mortgage as you need it and leave the rest invested to continue to grow since over time it is likely to outpace your mortgage interest by a large amount AND you leave that money free to meet other needs that may crop up.

:)

Answer 2

I like your thinking here, but you need to sit down and understand the consequences of your actions. I like the idea of paying off the mortgage early. The sooner you own it free and clear the better and this asset will be bigger than any 401k you have, but how have your tax returns been? Once this is paid off, you lose the interest write off so be prepared for that. Are you married, kids, these factors need to be taken in. Even if you pay the mortgage off in 5 years, you'll be 35 have have a tremendous asset for retirement. Honestly, I would knock this down to where you have about a year left on payments and then I would start looking at rates and see where you are. I would consider a cash out refi to about 50-60% ltv (no more) and put the cash into an ira, amortize the loan over 10-15 years, have an ira growning and a home paid off by the time your 50, hope this helps

Answer 3

Absolutely not. You should continue paying your mortgage monthly and contributing to your 401K. If you take out money then you loose money to gain in interest....and you'll lose the tax deduction you get from having a mortgage payment.

Answer 4

If you have the ability to save 260,000 in your 401k, then you probably have no problem making the mortgage payments. So definitly DO NOT steal your interest bearing investments from your 401k.

Answer 5

I wouldnt. There are usually penalities for paying off your mortgage. I would keep the $260,000 socked away in the 401 K. Besides, what if you have some sort of emergency? If you use the money now, you might regret it. So many variables in life, I wouldnt chance it!

Answer 6

Pay off all depts as soon as possible as you are paying interest,you will pay tax ,but your house being free and clear you can take out a loan for 25,000 to keep you running better than 105 thousand in dept,You WILL PAY tax at the time you cash in the 401 k so might as well enjoy it today as many idiots die and give all there money to uncle sam or the canadian government.

Answer 7

there's a lot of variables lacking in that question--how old are you? are you going to be able to put the money back in your 401K? what is the rate on your mortgage? what is your 401K earning?

You need to go pick up a copy of a Suze Orman book, I bet...good luck!

Answer 8

No, you will have tax problems and your 401 is earning on untaxed money and earnings are tax deferred. You are usually better paying your mortgage outside of your 401 and using it as a tax deduction.

Answer 9

NO!

You'll get whacked on the tax and penalties, and THEN lose the tax break from the mortgage interest. I think financially that would be devastating.

Answer 10

Absolutely NOT! That would take money you own to pay more taxes.