Carol wrote to me through the GetOutOfDebt.org site and asked the following question. If you have a credit or debt question you’d like to ask just use the online form. I’m happy to help you totally for free.
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“Dear Steve,
I lost my job. I am 65 years old and have a401k for $17000.00. Should I cash in my 401K to pay off my house.
Carol”
The Answer:
Dear Carol,
My gut reaction would be not to. Here is why.
Your 401K is designed to assist you in your older years. These days 65 is still middle age it seems. It is not time to retire.
If you tap the 401K over what you are allowed to take out there may be a tax penalty and you’ll just lose more money than you’ve already lost with the market downturn.
The 401K funds may be needed to feed you while you look for a replacement job. I assume you are doing that. You can’t eat house for dinner.
I asked my friend, Paul Bennett, a Certified FInancial Planner with C5 Wealth Management, what he thought about your situation. Here is what he said.
“As a common practice, I do not recommend that you pay off your mortgage as long as you have a competitive interest rate. The reason is because you get a tax deduction for the interest that you pay on your mortgage. For example, if your mortgage interest rate is 5-7%, after the deduction it is really only 3.5-5.5%. Your investments should outperform 3.5-5.5% over the long term (believe me; I know this hasn’t been the case recently, but try to stay focused on the long-term).
Not only does cashing in your 401k not line up well with what I’ve described above, you also end up having to pay taxes on the entire balance withdrawn – a double whammy! Do you have any other resources, either assets or pensions? If so, you’ll need to determine if you monthly inflows (from pension(s) and investments) are greater than your monthly outflows/spending. If so, then you’re in good shape. If not, then you’ll need to re-budget (cut back on spending if at all possible). Also, if you are eligible for Social Security you can start drawing it as early as age 62, which may make sense for you to do if you aren’t doing so already.”
