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I am over 59 1/2 and am considering withdrawing funds from my 401k to pay off my home. I know it's not considered smart, but the facts in my case are; I took out $60,00 loan to pay my soon to be ex-husband his share of our paid off house. Even with a low interest rate, because I had to take a long term to make the payments affordable, two years later, I still owe $58,500. I have tried to refinance, but after months of negotiations with my bank I was told I would have to put up over $10,000 to do that becasue my home is now worth less than $100,00. (When i refused the offer; I had stated my needs of no down payments, I was charged $700.00, so I was worse off than before. In addition, the banks force me to pay over $5400 in annual insurance.
My question; in my case, I think taking the tax hit might be wiser, since I can do without flood insurance and wind protection (Florida resident.) If I draw $30,000 in December and another in January, it would mittigate my increased income somewhat. I make a little over $55,000 annually. Thoughts?
Cash out 401k (typically you can only do this if you left the job and didn't rollover to another fund)
100,000 401k
- 20% IRS ($20,000)
- 10% Penalty (if under 60) ($10,000)
- 5% state income tax (if you have an income tax) $5,000
= $65,000 take home pay
Otherwise you will have to take a 401k loan, which are not typically penalized 10% if you're buying a home. Really depends on your fund. Everyone fund is different. Typical loan is no more than 5 years.
So you have a job making $55k and a bank wouldn't give you a mortgage for $60,000 on a house worth $100k? Did you use a broker? Or just one bank?
Wait.... Where did you get the loan to pay your ex? Home equity loan or personal loan?
Quote:
Originally Posted by C. Donovan
I was charged $700.00
Probably the appraisal fee. Normal.
Quote:
Originally Posted by C. Donovan
In addition, the banks force me to pay over $5400 in annual insurance.
Yes, this is also normal. If you have a mortgage, the bank wants to be sure you have insurance. In Florida this means flood/hurricane insurance. Normal.
The loan was called a mortgage, and if I pay off the house I would only buy normal homeowners, not hurricane or flood. And no, all the banks I tried said the same thing about the value to loan ratio.
Sounds like the banks your talking to don't have a program for you. Have you tried a mortgage broker?
Quote:
Originally Posted by C. Donovan
My question; in my case, I think taking the tax hit might be wiser, since I can do without flood insurance and wind protection (Florida resident.) If I draw $30,000 in December and another in January, it would mittigate my increased income somewhat. I make a little over $55,000 annually. Thoughts?
So you can take $75k disbursement from the 401k, pay the IRS 20% ($15k) and have $60k left to pay off the mortgage. It's an option.
Cash out 401k (typically you can only do this if you left the job and didn't rollover to another fund)
100,000 401k
- 20% IRS ($20,000)
- 10% Penalty (if under 60) ($10,000)
- 5% state income tax (if you have an income tax) $5,000
= $65,000 take home pay
.
My annual salary is $55,000; take home pay is approximately $38,000.
I will be 60 years old in a month. There is no state income tax in Florida. My tax bracket is $36,250 - $87,850; 25%. If I take $30,000 in December, and the rest in January, my income would still be in the 25% bracket. If my calculations are correct, I would owe an additional $7,500 in taxes for the two years.
That sounds like a good option. That would leave about half of my porfolio and since i figure I will have to work until I am at least 70, (I am in the unenviable position of having lost my pension to the Eastern Airlines bankruptcy and only having the 401k I've managed to build up since, and Social Security providing it still exists.) I have some time to build it back up if I'm not spending all my money on mortgage payments and insurance. Thanks.
Cash out 401k (typically you can only do this if you left the job and didn't rollover to another fund)
100,000 401k
- 20% IRS ($20,000)
- 10% Penalty (if under 60) ($10,000)
- 5% state income tax (if you have an income tax) $5,000
= $65,000 take home pay
Otherwise you will have to take a 401k loan, which are not typically penalized 10% if you're buying a home. Really depends on your fund. Everyone fund is different. Typical loan is no more than 5 years.
Just remember one thing with 401k loans. In the vast majority of plans, if you leave the employer, that loan becomes payable in full within 60 days of your termination date. That happens if you leave voluntarily or involuntarily. If you do not have the money to pay back, the loan amount becomes a taxable early withdrawal.
Conventional "wisdom" aside, using 401k balances to pay mortgage may make sense. Before you do the "math", guesstimate what you think your tax rate might be in the future (because of: deficit, Universal health care, law changes, greed, etc.). Also calculate the present value of your interest savings. Then, calculate the tax (use both current and “guesstimate)” plus penalty costs of withdrawals, and compare to the interest savings. The numbers will not look favorable, but they are worth considering. Show your figures to a financial advisor, and I promise they will balk (but remember: they get a “management fee” – on your hard earned money – regardless of whether they make money, and this has a HUGE compounding effect towards reducing your assets).
Take a gander at these:
[url=http://business.time.com/2012/11/28/fiscal-cliff-why-congress-might-have-to-mess-with-the-401k/]Fiscal Cliff: Why Congress Might Have to Mess with the 401(k) | TIME.com[/url]
[url=http://www.forbes.com/sites/nextavenue/2012/12/29/watch-out-your-401k-is-being-targeted/]Watch Out: Your 401(k) Is Being Targeted - Forbes[/url]
[url=http://cashmoneylife.com/can-the-us-government-seize-your-401k-or-ira/]Will the US Government Seize Your 401k or IRA? | Cash Money Life[/url]
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