Should We Cash Out the 401k to Pay Off the Mortgage? – Lorriell
 | By Steve Rhode Ask me your question. |
|
Lorriell 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.
Income from the GetOutOfDebt.org site advertising is used to help alleviate poverty. If you would like to help me to help others, there are easy and free things you can do, click here to learn how you can help.
“Dear Steve,
My husband and I are Mid-30’s and have been married and investing heavily for 16 years. We are watching our investments plunge. We owe $126K of $194K mortgage. No other debt. We are locked in at 4.75% refi. but wondering if cashing in one of 401K would be better. Wondering about the tax advantages/disadvantages. We are no longer contributing to this particular 401K.
We would put the monthly savings into newer 401K.
Consindering the economy only getting worse, should we cash in one of our 401K to pay off our house?
Lorriell”
Dear Lorriell,
I sent your question to the brightest Certified Financial Planner I know, Paul Bennett at c5 Wealth Management. Here is what Paul had to say:
Hi Lorriell,
Although tempting, cashing out your 401k to pay off a mortgage is definitely a finance “no-no”. The reasons are:
- You will immediately trigger income taxes on the full 401k cash out.
- Since you are younger than 59 1/2 you will trigger a 10% additional tax penalty.
- You will no longer have this asset growing tax deferred for retirement; potentially hindering your retirement plans.
- Your mortgage – 4.75% is a wonderful rate; and even better than that, after tax, assuming you are in a 25% tax bracket, the interest rate is really just a hair above 3.50%!
- Long term (not today, I know the markets are terrible now) you should outperform your effective cost of borrowing which is 3.50% by allocating your assets in a diversified portfolio of mutual funds and/or exchange traded funds.
- I would rollover your old 401k into a self-directed IRA where you can accomplish #5 above. This gives you much more choice than the funds available to you in your 401k, I’m sure.
The bottom line is your house will grow or decline in value irrespective of whether or not you pay off your mortgage. Give your money the best chance to grow outside the four walls of your home.
Hope this helps.
Cheers,
Paul
I think Paul has some very good observations and points to consider before you do anything rash.
Big hug.
Source: Should We Cash Out the 401k to Pay Off the Mortgage? – Lorriell
Originally posted 2009-03-03 13:46:40.
Other Related Articles to Read
Do You Have a Get Out of Debt Question You Want to Ask?
I'm happy to answer any question you have about how to get out of debt, as honestly as possible by sharing with you my experience and truth that I learned from helping thousands of people to get out of debt. Don't be shy, if you need help, ask now, click here.And if you want to follow the latest questions and answers, just subscribe to my site RSS feed or get the email newsletter for free.
I’m 30 years old & agree with the general concept from Certified Financial Planners about leaving your 401K intact, however after losing close to 25% from my 401k in the last year, and with the doomsday mentality in the media, whose to say that anybody can’t stand to lose another 25% to 40% in their retirement accounts due to a failing economy, or having another greedy Bernie Madoff come along and cause another major collapse to our economy.
From the end of 2007 to the end of March 2009, the average 401(k) balance fell 31%, according to Fidelity. Even though accounts have rebounded a little, along with the rest of the market, that’s little help for those who are retired — or were forced to — during the recession. In a system in which one year’s gains builds on the next, the disaster of 2008 will dent retirement savings long after the recession ends!!!
Remember, the biggest factor in whether the 401(k) works as designed has to do with when you retire. If the market rises that year, you’re fine. If you retired last year (2008), you’re toast. And the chances of you becoming a victim of this huge flaw in the 401(k) plan are pretty high. The market fell in “four of the nine years since the beginning of the decade”. That means anyone retiring this decade had a nearly 50% chance of leaving work in a down market. In fact, your chances of retiring into a down market are even greater than that: forced retirements spike in recessions just as the stock market is tanking.
A greedy government combined with greedy bankers and we have the disaster we see today in America!!!
[Reply to This Comment]