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After reading some of these responses and thinking about it I would think that it would make sense to just take out enough of the 401k to make the mortgage payments if the 401k didn't start dwindling very quickly. I had very bad luck with my 401k over the years. I have about the same amount of money in it today as I did about 11 or 12 years ago and that's because even though I was contributing the most I could which was 16% all of the money that the company was contributing was in the form of the stock of the company which went from over $60 a share to as a low as a dollar at one point and my 401k dropped to about $60,000 and it's taken this long to get back to where I was. After some of the scandals like the Enron situation they've changed the rules and allowed employees more choices of investment but it's too late for me now and I don't have much faith in the stock market or the other investment choices which is one of the reasons I've considered just taking what I have and paying off that mortgage. But I'm a very cautious person and want to understand every aspect of something as important as this financial decision. I appreciate the advice from all of you.
I'm not an accountant or a tax specialist, so if this sounds ignorant, feel free to disparage me.
What if Montana Guy borrowed the money from his 401K to pay off his mortgage?
When 401ks first got rolled out to the employees at my place of work, we were told by the representatives who set up the plan that we could borrow against 50% of the balance of the 401k to purchase a house. Then we would be paying back the loan from the 401k at an interest rate that was Prime plus a point.
As I see it, the downside is that the interest wouldn't be tax-deductible; the upside would be that you would be paying yourself the interest that would instead go to the bank or mortgage company.
Also, a loan isn't a taxable event -- no income tax would need to be paid on it (please see disclaimer at top of post).
Only 75% of the 401k accounts in existence allow borrowing against a 401k account.
The maximum withdrawal is limited to 50% of the 401k balance or $50,000, whichever is lesser.
You must pay the loan back within five years, or if the loan was to purchase a house then the law allows for 30 years for paying it back, but some plans limit it to 10 years.
If you leave your job either voluntarily or involuntarily, then the balance of the loan becomes due within 60 days. If you can't pay it back by then, the balance becomes a withdrawal from your 401k account and is immediately subject to taxes and penalties.
If you do borrow the money from yourself, then that money can earn only prime plus a point or two (say 6%), far below what a 401k should be performing at (say 15%). If you do this when you're young, then you're going to lose out on the gain that you should have been receiving over the life of the loan.
Doesn't sound like too good of an idea....nevermind!
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You could do systematic withdrawals from the 401K for house payments, but I would use it as a last resort. It can be a pain to get another home loan with low / no income, you might want to keep the loan you have and just pay the payments.
You should be able to get better income from the 401K than the interest on the house. Paying off with deflated dollars may benefit you as long as your 401 K is performing. If your 401k investment options are not good, then roll it into a self directed IRA, so you have better investment choices.
If you choose to pay off the house, you could get a Home equity line of credit if you need funds in the future, I have friends who use the HELOC for those 'unexpected' needs. You can get interest only payments to bridge needs, but eventually you will need to pay it off.
Getting out of debt is never a bad idea. It might reduce a tax write-off or you might take a hit for one year but you will won't owe a mortgage. So many people in this forum write post after post about how the government and corporations are out to get the little guy. Don't let the tax code manipulate you into staying in debt when you have the money to pay it off.
I would take the peace of mind of not being in debt over savings in taxes any day.
If you do borrow the money from yourself, then that money can earn only prime plus a point or two (say 6%), far below what a 401k should be performing at (say 15%).
15% is a very optimistic return for a 401k (or just about anything else). It's not impossible, but very few people are getting an average return near that mark.
I know there's pros and cons to this idea but I could easily live on my pension without that mortgage because I have no other debts and in three years I can start getting social security. What do you think of this idea?
At your age, you should not have bought a house knowing your income would be cut.
You're sadly mistaken about Social Security. If you're 59, then you fall into that age group whose official retirement age is 66 years.
Yes, you can draw Social Security benefits beginning at age 62, but you will only draw partial benefits, and you will draw partial benefits for the rest of your life.
Don't think for a moment that you will draw partial benefits and then at age 66 you will automatically begin drawing full benefits, because it won't happen.
THIS IS A PERMANENT REDUCTION if you start drawing benefits at age 62.
I doubt that you have kept current in whatever industry your former employer was involved. You need to be at the library or on-line reviewing professional journals about the health of your industry and your former employer, including the health of your pension plan. Your former employer could collapse leaving your pension plan bankrupt and having dumped your 401(k) into your mortgage, you'd be left with only half of your Social Security benefits for the rest of your life to live on.
I think your retirement was a little premature. You might want to consider going back to work to pay off your mortgage.
Not having a mortgage [and lowering debt] can be a big relief.
Lower stress is good, and a lower monthly budget is good.
In theory home mortgage interest is a tax write-off. Though for many folks since only the interest is a write-off, it simply may not be enough to allow them to itemize. Assuming that someone has been writing off their mortgage interest, may or may not be appropriate.
Paying taxes on the 401k withdrawal is a pain. And this is largely why I am leery of 401ks. The difference between tax-free and tax-deferred is a big difference. I remain in favour of tax-free.
It is a shame that your home is not an apartment building. Rental income, mortgage interest write-off, and depreciation, all come together to form an entirely different picture. Under those circumstances we would not be having a conversation about the effects of paying income taxes.
15% is a very optimistic return for a 401k (or just about anything else). It's not impossible, but very few people are getting an average return near that mark.
With the current depressed economic conditions, quarterly 401k returns are probably not at 15% for most people. However, I was thinking long term. Over a 20 year span, say from mid 1980's to mid 2000's, 15% is more likely, unless the 401k participant has been very conservative in choosing investments.
There is no guarantee that 401k's will return to the good performance seen in that time period. There's also no guarantee that they'll stay as bad as they have been.
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