Skimming a little off top of 401(k) to pay off mortgage...?

[mrsilv04]

I am seriously kicking around the thought of skimming a little off of the top of a 401(k) plan to use to pay off my mortgage... and freeing up that much of my paycheck every month. Basically, $29,000 would pay off my house.

I don't *need* this 401(k) for retirement, I will have a full pension from where I work now. This 401(k) was from my first two jobs, early in my career. I have it invested with Vanguard, and literally play around with it.

The 401(k) has literally doubled in the past two years.... and how much of that gain could be lost in one market correction? Instead of it disappearing in a market correction, I could pay off my house and still literally have something to show for it, as the money that I pull out of the 401(k) to pay off my house will still be making money, as my home continues to increase in value as well.

Of course, the other side of this is the loss of that $29,000 investment over time... for the next 15 years.

 

[ArrestMeRedZ]

Probably won't make a difference in my response, but how old are you and will Illinois tax your 401k withdrawal?

 

[Kawiguy454]

A financial guy would prolly say something like. The 401K generates more positive $$ than the interest you're paying on the house. So why get rid of a net gain? Also keep in mind that your mortgage is locked in to a dollar amount. As inflation eats away the value of dollars you're actually getting the house costing you less value as tomorrows dollars are worth less and less. Is there anyone not yet aware that inflation is coming?

 

[dadto2]

You are considering the opportunity cost of pulling 29k from the market, and that's significant. You are likely getting a higher return from that than your interest rate on the mortgage. Probably smarter to leave it. Also, are any of the stocks in the 401k paying a dividend? You'll lose that too.

Also consider that you will pay taxes that you deferred until later. The idea is that you pull the money out little by little after you retire when you are in a much lower tax bracket. You made that bet when you paid in. Pulling $29k in one lump sum is going to hurt. Hurt A LOT.

 

[haggler]

I havent purchased a home, but interest rates are at an all time low. So with that and good credit, you're better off refinancing. Likely your rate of return will outperform interest paid, unless theres a crash in the near future.

 

[Cripes]

I would not be comfortable touching my 401. If its a traditional 401 (not a Roth), a 29k withdrawal will create quite a taxable event.

 

[tmorris1]

I havent purchased a home, but interest rates are at an all time low. So with that and good credit, you're better off refinancing. Likely your rate of return will outperform interest paid, unless theres a crash in the near future.

It isn't going to make sense to refinance $29K no matter what the interest rate.

 

[dadto2]

I havent purchased a home, but interest rates are at an all time low. So with that and good credit, you're better off refinancing. Likely your rate of return will outperform interest paid, unless theres a crash in the near future.

If he's younger than 50, riding out a crash will still likely be a better option in the long run.

 

[AZjeff]

All good thoughts but doesn't free up additional monthly money now as he stated in his first sentence.

I'm 64 and recently did this to go into retirement with no debt and free up monthly income. Different situation and timeline and arranged it with advice from my investment guy.

It doesn't sound like he's contributing and feels confident about his financials otherwise. Taking the profit and paying off debt doesn't sound like a bad idea, better than buying a boat with it. Taxed and penalty need to be factored in. There are some temporary rules about withdrawing from 401k plans without penalty due to Covid that I don't know much about that should be checked out.

 

[dadto2]

It isn't going to make sense to refinance $29K no matter what the interest rate.

Agree.. Paid most of the interest already, no reason to pay points now.

 

[brianl703]

The 401(k) has literally doubled in the past two years.... and how much of that gain could be lost in one market correction? Instead of it disappearing in a market correction, I could pay off my house and still literally have something to show for it, as the money that I pull out of the 401(k) to pay off my house will still be making money, as my home continues to increase in value as well.

You could also move some of your 401k balance into less risky investments if you're concerned about market volatility. No need to cash it out for that.

 

[Lubener]

I would not touch anything in your 401k. Don't forget you will have to pay taxes and an early withdrawal penalty on that 29k. It could bump you into the next tax bracket too, loss of growth on the 29k as you stated over 15 years. 15 years is a long time to make up for a market correction.That withdrawal will cost you more than you think.Your on the back 9 of your mortgage so all your payments would go to the principle anyway. Most pension plans now are underfunded anyway and are not a sure bet over the long haul. You'll be glad you have your 401k as well.

 

[JHZR2]

Can you borrow against it at favorable rates, like 0%?

I wouldn't skim off the 401k if it will trigger withdrawal penalties. But if you an get some favorable terms, it might be good to pay yourself back. Essentially, take a loan against the appreciated securities, and pay yourself back at low/no interest. Depends on if you can get an interest tax deduction or whatnot on your existing mortgage.

Generally I wouldnt touch it, and just figure out how to cashflow the last $29k in the home stretch... But there may be a favorable game to play. Just dont get trapped into needing to pay extra penalties or taxes.

 

[Dave Hess]

I would not touch your 401K to pay off $29K balance.

 

[Aredeeem]

What’s your mortgage rate? Are you making that much with wherever that 29k is now? Can you pull that much out without incurring fees? Will it put you into a higher tax bracket, or can you spread it out over 2-3 years to avoid a higher tax bracket? 29k is not worth tossing and turning over. If you want to pay off the house do so. You’ll get more satisfaction sitting around the Holiday table gently bragging about having the house paid off then you will talking about 29k earning dust.

 

[opus1]

No.

No.

Having the promise of a full pension doesn't mean it will be there when you need it, unless you work for a government entity. Also, should you decide to change employers (or if it's decided for you), if you take a loan vs cashing out, the balance of the loan will become a taxable event unless you have the money to put it back into the 401(k) - a friend of mine got stung by that when we got outsourced.

In case I didn't make it clear, no.

 

[JeffKeryk]

Withdrawing 401K early will trigger penalties. Why would you do that? I would try and find money elsewhere.
I hate loans, so I know how you feel. What is your interest expense? Perhaps take advantage of today's rates, if that lowers your expense.
There are answers, and congrats on getting that home paid off. It is a great feeling.
Good luck.

 

[86cutlass307]

Can you borrow against it at favorable rates, like 0%?

I wouldn't skim off the 401k if it will trigger withdrawal penalties. But if you an get some favorable terms, it might be good to pay yourself back. Essentially, take a loan against the appreciated securities, and pay yourself back at low/no interest. Depends on if you can get an interest tax deduction or whatnot on your existing mortgage.

Generally I wouldnt touch it, and just figure out how to cashflow the last $29k in the home stretch... But there may be a favorable game to play. Just dont get trapped into needing to pay extra penalties or taxes.

If your employer offers a 401K loan option, that is your best option to avoid penalties. You pay yourself back + interest all of it to yourself; if the loan option exists, spread the payroll deduction over a period of time that won't impact you to an extreme degree. Hopefully, you have a sufficient period of time to satisfy the loan.

 

[PandaBear]

Age matters, and your mortgage rate matters. At most you should just borrow against 401k to pay off your mortgage. This would be tax deferral still and you are paying yourself interest rate. Personally unless you want to avoid some super high interest rate or second mortgage, primary mortgage insurance, etc I would not do that.

 

[Dave Hess]

Many 401K accounts allow you to take a loan without any tax penalties.