My father wants to use his 401k to pay off his mortgage...help.?

Question

My father is 65 and will retire this summer. He is convinced he must use the $107,000 in his 401k to pay off his 100k mortgage. He has no other retirement savings (no emergency fund) and will draw about $1800 a month in SS with $800 from my mom. Using the 401k to pay off the mortgage doesn't sound like a good idea to me but I don't know how to explain why. Can someone help?

Answer 1

If he insists on retiring (rather than working a few more years to be more financially prepared), then ideally I agree that he should pay off the house as soon as possible. Ideally you'd have the house paid off before retirement to lower monthly expenses and minimize 401k withdrawals. If he had no mortgage he could probably live very comfortably with his wife off their $2600/mo SS.

But there is no need to cash out the whole 401k to pay off the house immediately, and in no event should your parents leave themselves with no savings whatsoever. First of all, he'll only have about $80,000 if he cashes out the 401k anyway--so he can't afford to pay off the house. He'll have no savings AND $25,000 left on the mortgage. Plus if a medical emergency like illness, disability, or death strikes the family, your father (or mother) will have absolutely no money to cope with it. They might have a paid off house, but they'll have no money! They'll have to borrow against the house, generating tons of fees and interest, and then they'll have no savings AND a mortgage.

You are likely going to end up having to take financial care of your parents (one or both) at some point in the future. You have a stake in this and should sit and discuss their options and their plans. Tell them you're concerned and want them to be in the best situation possible.

I think they should live off thier social security income and take out exactly enough from the 401k to pay double the mortgage owed each month. That way they gradually pay off the loan but don't fully deplete their savings--plus the savings will continue to grow while they use it to pay off their home. Hopefully in a few years they'll have the house paid off AND have money left in the 401k for emergencies.

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

Assuming the 401k is tax-deferred, he will have to pay taxes on the $107k when he withdraws.

The $100k morgtage balance is a nice tax write off.

So he'll be paying tax once on the 401k and use the post tax money to eliminate a subtantial tax write off.

If he's concerned with high monthly payments, he should consider refinancing the outstanding debt on his house. If he's concerned with possibly losing his most valuable asset, he should consider a payment plan that pays down his balance in a shorter period of time.

Ultimately, depending on where you live and the growth of the housing market in that area, putting all his money into the house may or may not be a good investment. He probably already has enough equity in the place to begin to diversify.

Good luck.

Answer 4

Because the taxes on the 401K will eat up quite a bit of it. He is not that far off though. What you should suggest is that he takes out 1 year worth or maortgae payments at a time leaving the rest of the money in the 401K to grow.

If he takes it all out and pays off the house its not the end of the world, now he has one less large bill to pay every month and can live off his $1800 quite easily.

Answer 5

He is not financially ready to retire and should really rethink this move. $1800. per month does not get you much - health care and supplemental insurance. He should have been living on that amount already as a practice run and using anything over to pay down his mortgage - but getting beyond that, he really does need the help of a professional adviser - it will be money well spent (maybe as a gift from you if he finds intangibles like advise too hard to pay for). Good luck.

Answer 6

when your father will start withdrawing from his 401k plan his income will go up (he will have to pay taxes on the money he withdraws) . If he puts the entire amount of withdrawal towards his mortgage, he will not have money to pay taxes.

Why does he want to pay off mortgage anyway? The interest on the mortgage is probably %6 or so per year, the money in 401k can usually earn more in the market.

Answer 7

First, he won't get enough to pay off the mortgage if he does a 401(k) cash out. They will withhold ( or he will have to pay at tax time) at least 25% in taxes which will leave him with 80k in cash at best. Second, the mortgage interest will be needed as a tax deduction to offset any future earnings. Let him know that just becaause he retires, he will continue to pay taxes. I strongly recommend that he sit down with a qualified retirement planner and look at what his options are to best handle his future.

Answer 8

wont paying off the house take a huge load off his shoulders?
It would depend on what his credit is like. If he'll need, he can do the line of credit. Dont let him get the idea of a reverse mortgage later down the line. Good luck and congrats to your dad.

Answer 9

he doesn't have to use that money for anything. there is nothing that says the money in his 401 has to go on the house payment. why does he think he has to pay the mortgage off?

Answer 10

This question is impossible to answer correctly without knowing other specifics of his financial life (life ins. policies/cash values, equity built up in the home, etc.) I would urge him to seek the expertise of a professional who advises people on these matters.