My sister and husband have over funded their 401K's and are looking for ways to utilize this money without incurring a penalty.
2007-06-01 06:23:01 · 8 answers · asked by KhrisB 3 in Business & Finance ➔ Personal Finance
If they have already "overfunded" (ie exceeded IRS maximums), they will pay penalties anyway.
But in 99.9% of cases, borrowing from one pot of money that is earning, say, 10%, to pay off a debt that is accruing at 5-6% is just dumb. Add to that the fact they will owe a 10% penalty plus income taxes (in addition to any overfunding penalties) on any withdrawals, and it just becomes a really silly thing to even think about. Would you pay $10 a week to get an $8 a week raise? I hope not!
That said, what they should probably do is get the overage sent back to them:
http://www.greenwichtime.com/business/yourmoney/sns-yourmoney-0429journey,0,7621080.story?coll=scni-classified-navigation
If they then want to use that cash to pay extra on mortgage principal, that probably makes sense, unless they have any other debt...
2007-06-01 06:35:09 · answer #1 · answered by Anonymous · 0⤊ 0⤋
No, it's a bad idea.
In any case, how do they know they've over-funded? Unless they are retiring in the next few years, they can't know that. And even if they have, then the money will still be useful once they are past 59.5. If you mean that they paid in more than the maximum for the year, they should talk with the IRS about the best option. The IRS are usually willing to work with people who make genuine mistakes.
NEVER take money from a 401K - it's a sucker bet.
2007-06-01 13:47:30 · answer #2 · answered by Anonymous · 0⤊ 0⤋
Overfunded? That sounds strange to me. Even if they put the max amount allowed under the regulations every year, I can not see how it is overfunded. That being said, if they are going to take a loan from their 401k to pay off their mortgage, then it could be ok, however, they will lose the interest deduction and they will be putting ADDITIONAL money into their 401k as the interest paid in the loan goes back into their account.
2007-06-01 13:28:29 · answer #3 · answered by Mom of 2 4 · 1⤊ 0⤋
The following should give you some useful information:
http://moneycentral.msn.com/articles/retire/basics/4714.asp
One other thing: Your sister and brother-in-law will, in effect, be borrowing from themselves. If they get into a financial bind, what is the first thing they are not going to repay?
The money they "owe" to themselves.
If they take a loan from their 401(k)s and eliminate their house payment, they need good discipline to ensure that they invest an identical amount (or more) in an IRA or a Roth IRA.
One problem with this is approach is that self-directed IRAs can lose a lot of money if the investors are not experienced at putting their money to work in the market.
The real key to this issue is for your sister and her husband to be as sure as they can be that, down the road, they will never have to look back and wish they hadn't done it.
Whatever they decide, I hope it works out well for them.
2007-06-01 13:55:17 · answer #4 · answered by SCOTT M 7 · 0⤊ 0⤋
Nope, you get to deduct the interest from your taxes from a mortgage, and money taken from a 401k to pay off a mortgage will not be growing, so it's a double whammy.
2007-06-01 13:26:47 · answer #5 · answered by 006 6 · 0⤊ 0⤋
Don't do it! They might be penalized for withdrawling from their 401K...and another thing...a house is the best tax write-off ever! My tax man said to always owe at least $100,000 on your house...you need the write-off!
2007-06-01 13:31:49 · answer #6 · answered by seeso 3 · 0⤊ 0⤋
No No No No and did I say No
2007-06-01 13:25:26 · answer #7 · answered by Tutto Bene 4 · 0⤊ 0⤋
no, that is a very bad idea!
2007-06-01 13:30:33 · answer #8 · answered by Bachii 3 · 0⤊ 0⤋