Two reasons not to: Taxes and Taxes !!!
Why pay the penalty? It's like giving away a good percentage of what your 401 has earned for you over time!!
Second reason: Home mortgage interest is one of the few respectable tax write-offs that " the little guy" gets in our system. You'll end up paying more in taxes if you give it up.
"...security for life"...THAT is what your 401 is going to be down the road... right now it's growing...don't nip that effort in the bud. Leave it alone, and it most likely will grow well beyond the price of your home....If times are tough, maybe reduce your contribution to the 401...eke out a few more bucks every week that way...
What are your investments in the 401 ? Are you getting real decent returns ? Over 10%?..Hopefully 12 or 14 ? If not... look back through all these answers... read anything that has to do with " allocation"...and get that thing cooking. YOU WILL NEVER REGRET IT..... and if you blow it off, you probably will.
2007-12-05 11:07:14
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answer #1
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answered by jebediabartlett 6
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Answer: NOOOOOOOOOO!!!!!!!!!!! The tax implications will be huge! First, you will pay a 10% early withdrawal fee, then pay current income taxes. Let's say you're in the 25% tax bracket. That's a total of 35% of your savings gone! Not dumb, but certainly not the best move you can make. Pay off your home with your salary, not your 401 (k) contributions. That's why the government has no problem with you doing it, because they are counting on you not knowing the tax implications of this. Far too many people go down that road.
2007-12-06 00:08:27
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answer #2
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answered by Anonymous
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What the other people have said is correct but what hasnt been mentioned is borrowing from your 401k. This is possible without incurring a tax penalty. It works because you pay the borrowed money back to your 401k plan (both principal and interest goes directly to you) It usually doesnt make sense because if you quit your job or get laid off, then you immediately have to pay that money back or it will count as a distribution and be taxable and get a 10% penalty. On the other hand, if your mortgage payment is not tax deductible any longer, you are in a very secure job, and have a relatively high interest rate on the mortgage (lets say 7% or higher) then it might make sense in your case.
2007-12-05 19:08:35
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answer #3
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answered by ck-cfp 2
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Its not dumb, its just doesn't make any finanical sense to do so. When you cash out you 401K plan, since it is taxed deferred, you will get hit hard with taxes. 20 - 25% on taxes, then 10% penatly for early withdraw if your under 59.5 yrs. old. Then you will lose the time invested to pay off an interest rate that is generally lower than the returns on your 401K investments. Now if your making less than your interest on your mortgage you should seek an financial coach to look over your 401K plan. My investments have been making over 12% a year since I started investing 2 years ago. 12% vs. 8% = Alot more money
2007-12-05 18:03:23
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answer #4
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answered by jeffery d 5
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In a simple term, it's like using a credit card that charges 40% interest. Would you want to use a credit card that charges 40% interest? Not me!
You'll get taxed about 10% for the withdraw. Your contributions were pre-taxed.
You'll also have to pay a early withdrawal penalty of about 10%.
If you don't pay back the 401(k), then they will tax you for ordinary income.
Finally, when you put that money back in, and you retire at 65, guess what? You'll have to pay tax....AGAIN! Twice taxed money isn't fun!
2007-12-05 19:55:26
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answer #5
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answered by RAWBERRY-SHOCKLATE 4
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How does owning your home give you security for life??? Once you hit retirement & have no money (in your 401k), what is your plan to pay your bills?? Does your home have plans for doing that???
Don't get me wrong, owning your home is nice. But that's not going to pay your bills, put food on the table, pay your taxes, insurance, gasoline, heating bills, etc, etc.
2007-12-06 04:46:55
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answer #6
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answered by exactduke 7
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It is NOT a dumb idea to pay off your home with 401k! The fee is an extra 10% on your 401k and if you need the money then it isn't really that hefty of a fine. So if you need to pay off your house then go for it.
Should YOU do it? No. The way mortgages are setup are that most of the interest expense is frontloaded so I am guessing that if you can afford to use your 401k to pay off your house, then I am guessing that you are near the end of your mortgage and have already paid most of the interest already. So all you have left is principal to pay so I don't see the advantage of taking a 10% penalty on your 401k.
Check out this link and see the frontloading of interest with this hypothetical loan.
http://www.bankrate.com/brm/mortgage-calculator.asp?unroundedPayment=1199.101050305514&loanAmount=200000.00&nrOfYears=30&nrOfMonths=360&interestRate=6.00&startMonth=11&startDay=5&startYear=2007&monthlyPayment=1199.10&showAmort=Show%2FRecalculate+Amortization+Table&monthlyAdditional=0&yearlyAdditional=0&yearlyAdditionalMonth=11&oneAdditional=0&oneAdditionalMonth=11&oneAdditionalYear=2007&paidOffDate=Dec+5%2C+2037
2007-12-05 18:41:25
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answer #7
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answered by Dom 5
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Like ti has been mentioned the tax on the loan will not be worth it. The 401k is supposed to be your security until you BUILD up security otherwise.
2007-12-05 17:58:17
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answer #8
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answered by John A 3
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if take $100K out, you pay $10K in penalties and then you pay anout $27K-$40K in taxes (depending on where you live) and you only get a check for $50K-$63K.
2007-12-05 21:47:33
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answer #9
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answered by NYC_Since_the_90s 6
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#1 - MAJOR tax hit on the withdrawal
2007-12-05 17:53:30
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answer #10
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answered by ckm1956 7
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