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Are you under 59 1/2 years old? Then yes the 10% penalty applies. If older then no penalty, but you still pay ordinary income on the draw from the 401k. There is a myth that there is no penalty for using 401k money for a down payment, but its not true. Some 401k plans will let you take a hardship withdrawal for a home down payment, but you are still liable for the 10% penalty. And some 401k plans won't even let you take the money period, forcing you to do a 401k loan instead.
In any case, why would you consider doing such a thing??? That seems about as foolish an idea as I could imagine. Take a small loan if that gets you a required down payment for a primary residence, but only within reason. Most certainly do not pay off a mortgage with 401k money.
I think Willy has it right. Depending on what you are trying to do, you might refinance what you still owe on the house, rates are good now, if you are trying to reduce monthly expenses.
If, like me, your parents or grandparents lived through the (early 20th century) depression, you may have got the impression from them that having a mortgage is a bad thing in iteself. And, the mortgages that they had back then *were* bad, most all of them were just for a few years and then balloon payment. A regular fixed rate mortgage with a term that results in payments you can live with is not a bad thing, so long as you can make the payments.
But if you have enough in your 401K to be *able* to pay off your mortgage, and still pay the 10% and the taxes on the income (if you had to do this, it would make sense to me anyway to try to wait till January of the first year you have no income, so as to minimize taxes - I guess this assumes you won't have much income in that year, in the current economic environment that's probably a realistic assumption) - that's a good thing in as much as you can avoid losing the house, but it's not an ideal way to pay the mortgage off.
I agree with the other posters. Think about it this way: If you take the money out of your 401K (for example, $100K), you will pay a 10% penalty ($10K) if you are under 59-1/2; and another 25% ($25K, depending on your tax bracket). That's 35% or $35K on $100K! --- You could get money from a 'loan shark' for that type of interest.
Are you unable to qualify for a 4-5% fixed loan? --- or could you simply continue to pay-off your existing mortgage (perhaps reducing your 401K contribution ... also a bad idea if your company is paying a matching conctibution). [Sometimes, you can 'borrow' the money from your 401K at a reasonable interest rate, without paying taxes of penalty, but, you still wind-up 'paying it back' with post-tax dollars.
[Sometimes, you can 'borrow' the money from your 401K at a reasonable interest rate, without paying taxes of penalty, but, you still wind-up 'paying it back' with post-tax dollars.
NO, that's a myth as well. There is no difference between the principal that you take out from your 401(k) and the money you repay it with. The only thing that would be post-tax would be the additional interest that you put into the 401(k).
Look at it this way: Let's say you borrow $10,000 from your 401(k) and then put it into an envelope and tuck it away in a desk drawer for a year rather than spending it. After the year, you take the money out and redeposit it in your 401(k). How has the money changed? How has it now become post-tax dollars? Answer: it hasn't. There really is no difference between this scenario and the usual situation where you spend the money and pay it back out of your paycheck. It is the same $10k going back into the 401(k); it doesn't matter whether you spent it or tucked it away for a year. The $10k that you put back into the 401(k) doesn''t magically become post-tax dollars.
If you borrow money from your 401k, you are required to return it within a specified period of time. If you do it, then there's no tax consequence. If you fail to do so, you will trigger a tax penalty which will mean that any money redeposited into the 401k is after tax money, since you'll have to pay tax on it. To make it worse, you'll have to pay tax on it again when you withdraw it after retirement.
401k is still your money, but yeah, you need to know fully well the taxes and penalty.
I will consider taking out money from my 401k as one of the tools in restructuring / avoiding bankruptcy.
As to weather using it to pay off a mortgage, I'd look into strategic default on underwater property as well as looking for other place to live in. And weight in if that underwater value is an acceptable loss, or perhaps if I can wait out (time) for the values to rise back into positive equity?
401k is still your money, but yeah, you need to know fully well the taxes and penalty.
I will consider taking out money from my 401k as one of the tools in restructuring / avoiding bankruptcy.
As to weather using it to pay off a mortgage, I'd look into strategic default on underwater property as well as looking for other place to live in. And weight in if that underwater value is an acceptable loss, or perhaps if I can wait out (time) for the values to rise back into positive equity?
why would you take out money from 401 k to avoid bankruptcy..
If you borrow money from your 401k, you are required to return it within a specified period of time. If you do it, then there's no tax consequence. If you fail to do so, you will trigger a tax penalty which will mean that any money redeposited into the 401k is after tax money, since you'll have to pay tax on it. To make it worse, you'll have to pay tax on it again when you withdraw it after retirement.
if you take it as a loan there is noooooooooooo double taxation on 401k loans. only the interest you pay is taxed 2x not a penny of principal gets taxed 2x ever..
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