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?
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:
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.
I think Paul has some very good observations and points to consider before you do anything rash.