Should she pay her house off?

Question

My aunt has about $180K in her 401 (that's her only savings), and owes $48K on her home. She doesn't draw on her 401 because she has a moderate monthly retirement income but she doesn't trust it will last. Her financial advisor said it would be wise to pay off her home so she will own it, even if it means taking that money out of her 401 to pay it off. I think I agree but she'll get hit hard with at least 20% federal taxes up front by withdrawing enough to pay her home off, as well as it being added to her income the following year. But, at least it will be hers and she's 61 years old and needs all the security she can get. She is a very special woman who loves her home so much. She doesn't work--she's retired. Do you agree that is a wise move to pay off her home with 401 funds?

Answer 1

She has security - in the 401k. I don't understand why shifting the money from her 401(k) and paying a lot would make her feel more secure.

Her net worth is the same either way.

I'm all for paying off a house, but I would not take money out of my 401(k) to do it! Bad idea.

Having the house paid off does not protect against fire, flood, etc. If she runs into hard times, she will have a payment, but she will have 48K more in her 401(k) and she can use it then.

Answer 2

It's one option but what kind of a return is she making on the money in the 401? Chances are the return on the 401 is more than the interest on her mortgage. Better to leave the money where it is.

At 61, your aunt isn't that old. If she's living on a moderate monthly retirement, there's bound to be all sorts of things that will come up that she might want to draw money from her 401, in smaller increments.

Pulling $48K in one lump would certainly put her in a higher tax bracket.

Answer 3

Not exactly. Could you help her get another opinion? 20% is quite a hit to take on taxes, that is almost $10,000. That's is over $800 per month she could be saving. I would think that having a mortgage no matter how small is a tax advantage. her payments can't be that large, and taking the interest and property tax deductions each year would be a good thing wouldn't it. Well maybe I don't know much, but thought I would add my 2 cents...

This Gregg dude sent me an email earlier telling me I was pretty stupid about foreclosures... I thought he was rude, but ...

Answer 4

The Scorpion man is dead on. Keep the debt and the tax writeoff, and let the 401(k) build. Do your aunt a favor and kick that advisor in the ole' back door, then find her another. Make sure that advisor isn't buying and selling her stocks to send himself to Maui.

Answer 5

She could wait until her modest monthly retirement income ends then take money out of the 401k, by that time she'd have grown her 401k and will need to take less out to pay off the house, plus meanwhile she gets the tax deductions from the mortgage.

Answer 6

I think she would be wise to just go ahead and withdraw the money and pay it off. Even if she gets hit hard this year the future years she will not have to worry about paying her mortgage and she could save the money she had used to pay on her house payments each month if she is worried about not having enough money. I wish your aunt luck in this hard decision.

Answer 7

What's the hurry? If she decides five years from now to pay off her house, she can take the money out of her 401K then, and it will have had another five years to appreciate. Unless she has some absolutely outrageously high rate on her mortgage, I'd just leave it alone.

Answer 8

Not no but HELL NO. Never pay a house off early, that's good debt assuming the interest rate isn't rediculous. The tax hit would be disastrous and nothing would be gained, in fact it would be a huge loss. Her advisor is a fool, and she should find another one.

Answer 9

Doesn't really sound like a good idea, esp with tax penalties