Under a hardship withdrawal, can I use the entire 401(k) balance to pay off my mortgage?

Question

If I lose my job, can I apply my entire 401k balance (over $200,000) to pay off my mortgage?

Answer 1

Well, you can use the money in whatever manner you choose, but if you do not roll it over, then not only will you be subject to income tax at your marginal rate, you will also be subject to a 10% tax for early withdrawal. Using it to pay off your mortgage does not constitute a hardship that will qualify it to be exempt from the penalty.

Answer 2

Another poster got it right..if you lose your job then it's a distribution and not a hardship. If you are under age 55 (not 59 1/2...but 55!) when you lose your job then you are not subject to the 10% penalty. If that's the case then you'll only be subject to the 20% withholding requirements. However, if you're taking 200k that won't be enough to pay the taxes. You'll owe an additional 30-40 thousand dollars at the end of the year. And if you're under age 55 then add the 10% extra tax onto that and it's 50-60 thousand. Not a good thing!!!

Besides the loss of retirement income (200k earns a lot of interest each year), you'll also be tying your retirement up into a house and be totally dependent upon selling the home to live. Defeats the purpose of paying on it doesn't it? Don't you pay on your home so you can have a place to live when you retire?

If you lose your job and want to keep the house then figure out how much 6 months of payments are...then take THAT amount as a distribution. Roll the remaining amount over into an IRA. That will lower the distribution amount tremendously and quite possibly keep you within screaming distance of the 20% tax bracket. If you can do that then you'll only owe the 10% extra penalty come next april.

then if you still haven't found a job after 6 months you can do it again from your IRA. But again, don't tap too much...You must try to keep as much invested as you can.

Your mortgage is at a low interest rate so your 401k is likely easily earning far more than you will earn there. And, typically homes only appreciate an average of 5-7% a year. Yes, we've been far above that recently, but that's no guarantee that they'll continue at the recent pace. In most areas prices have declined...and they'll come back in line with that 5-7% a year. Properly invested, you'll earn about 11% a year in the market.

Another thing to consider...if all of your money is in your house but your home is currently undervalued because your area is depressed...what can you do if you need retirement money? You have to absorb 100% of the negative hit and sell...but if it's in the market (your 401k or IRA) and you need retirement money you can sell just a portion of your account leaving the rest to recover with the market.

Answer 3

You can use the money from your 401k, but there's a 20% penalty or so to remove it. I know you can use it for a down payment on a home without penalty, but I'm not sure if withdrawing it for the sake of damage control is possible.

You should call your 401k provider and see what they have to say.

But either way why pay off the entire mortgage? Why not pay it monthly as you normally do. You may need the money for other things, and there's no point to pay more in advance if you'll have other costs.

Learn more at http://www.thetruthaboutmortgage.com

Answer 4

First of all, you would not be using a hardship withdrawl if you were terminated or lost your job. You would be able to take that money and use it as you want (the vested balance). You may only obtain a hardship withdrawl while you are currently employed and there are several provisions to using that. Like threat of foreclosure or other immediate reasons to prevent conviction or bankruptcies. Now, after you are terminated I believe that would be a horrible idea to take all of your monies and payoff your bank note and this is why: My guess is you are under 60 years old. You would pay a 10% penalty on those dollars taken out for a pre-payment penalty. Not to mention you will be torn apart in taxes. When it is all said and done you will lose, in my estimation around 25-35% of those monies just in penalties and taxes. You will pay less in taxes when you enter retirement as those funds are your sole source of icome less Social security (if that exists when you retire)..

You need some advice before you make a harsh decision like this. It may cost a couple of hundred dollars to talk to an accountant - but it will save you thousands if you were to make a decision as you proposed. Good luck.

Answer 5

I would definitely not recommend that. You will pay at least a $20,000 penalty right off the top and then taxes on the balance. You are likely only going to get your hands on about $130,000 of your 401K if you cash it in early.

You are better off trying to find a way to pay the mortgage payment. Tapping your 401K would be a disaster of epic proportions.

Answer 6

If you are over age 55, then there is no penalty, you will only have to pay the taxes (20%). You would pay those taxes whenever you decide to withdrawal the money, whether it be now or later, small amounts or large amounts, 20% is 20%, same amount either way you will pay it. If you are younger than 55 then you will also have to pay a 20% penalty. That's what I would try to avoid.

Answer 7

Depending on your tax bracket, if you are under 59.5 you will only get about 45% of your 401(k) balance after penalties and taxes.

If you can't afford your house, don't "sell your future", sell your house! Hopefully it's worth more than the balance you owe, pay it off and use the rest to pay rent somewhere until you get yourself straight.

Good luck...

Answer 8

I do not recommend this at all.

Avoid this at all cost.

You will pay an excessive amount of taxes on this.

I would highly recommend that you refinance the loan. Interest rates should be declining very soon!

Hang in there!