Taking out of 401k to pay off the mortgage
- Thread starter BlIIlken2
- Start date
??? Show the math. It's probably about the most terrible decision that could be made.
It's probably a bad idea, but if you have a high interest rate, it's not the worst idea you could have.
What do you think the tax penalty is on taking money out of your 401k?
May work out…..saving a guaranteed amount of interest versus losing money
No, I don't think so. Tax penalty, income tax - you end up with half of what you took out.
Of course, if the market goes down 75% it's a great idea.
Of course, if the market goes down 75% it's a great idea.
The math is almost certainly not in favor of using a 401k to pay the mortgage. But can see scenarios where it is not a crazy bad as people think.
We may be headed into a multi-year recession/depression, during which your 401k will be useless. Depending on your job security and how far you are into your mortgage, I can understand the emotional logic.
One of my grandmother's earliest memories was watching her mother crying when she found out they were being foreclosed during the Depression.
We may be headed into a multi-year recession/depression, during which your 401k will be useless. Depending on your job security and how far you are into your mortgage, I can understand the emotional logic.
One of my grandmother's earliest memories was watching her mother crying when she found out they were being foreclosed during the Depression.
No, I don't think so. Tax penalty, income tax - you end up with half of what you took out.
Of course, if the market goes down 75% it's a great idea.
The market is waaaay overvalued right now, even after the recent crash, and Trump is the POTUS. I don't think a 50-75 percent drop is unthinkable.
Again, I would not recommend it for most people. But I don't think it's crazy either. For some people, it could make senseZ
Still NO. Put the money into a stable fund or cash option in the account if you are scared of the market downturn. If you lose your job and are in danger of losing the house there are potential hardship options out there that could still help you avoid the tax penalty while taking a loan... It's a horrible, horrible idea.
Just depends how long the Trump depression lasts.
Who didn't see this coming?
Who didn't see this coming?
Are you the type of person who sells at the bottom?
Ideally, you should ride this out and add to your 401k while things are cheaper. But I personally know people who tried to ride out the Great Recession and ended up panicking after it went on longer than they were expecting, literally selling at the nadir of the bear market.
Stupid? Maybe. But you really have to be honest about what kind of person you are and how much risk and upheaval you can tolerate.
Ideally, you should ride this out and add to your 401k while things are cheaper. But I personally know people who tried to ride out the Great Recession and ended up panicking after it went on longer than they were expecting, literally selling at the nadir of the bear market.
Stupid? Maybe. But you really have to be honest about what kind of person you are and how much risk and upheaval you can tolerate.
Unless you're 70 years old, or have a 20% interest rate on the mortgage, that is just a really terrible idea.
I assume you mean through an internal loan and not taking out and paying a tax penalty. I think the cap on a 401K loan is 50K and max time is five years, so you would have to owe less than 50K and have a high rate for it to maybe make sense. The 401K loans are not great ideas because you are potentially leaving big gains from that pot of money. But they also are not the worst idea because they can be useful for paying off high interest rates if you have a lot credit card debt. The loans typically have low rates, tied to a few points above the prime rate (so right now you could probably get a 7-8% one) and far less than credit card and credit line debt. But the one shocking thing most people do not realize is the loan's interest payments are also paid to your account, not to the 401K company or your company. So you get all the money back and it forces you to pay yearly interest on it.
So if you are juggling credit card debt or credit line debt in the double digits for interest, it is not the worst idea IF you think the next 4-5 years are not going to be worth much more in stock because you are making a weird little deal where you pay off high interest debt and then pay yourself back with interest at lower rate and guarantee that loaned part of your 401K makes some money ....from you....those 5 years.
So if you are juggling credit card debt or credit line debt in the double digits for interest, it is not the worst idea IF you think the next 4-5 years are not going to be worth much more in stock because you are making a weird little deal where you pay off high interest debt and then pay yourself back with interest at lower rate and guarantee that loaned part of your 401K makes some money ....from you....those 5 years.
Any withdrawal will be taxed at the higher end of the progressive tax rate. Let’s assume your blended tax rate is 18% coupled with 10% penalty if below 59.5. That’s a 30% tax on an asset designed for retirement.
If under 55 your plan will not allow for partial withdrawal, usually have to be 55 years old.
There isn’t an advisor in the industry that would back you on this move.
If under 55 your plan will not allow for partial withdrawal, usually have to be 55 years old.
There isn’t an advisor in the industry that would back you on this move.
Details matter in an investigation . . .
Its not a fore gone conclusion he is paying a penalty on the 401k. Its also not determined what the tax consequences will be of a draw. If I have someone with a farm that is knocking down earned income, and of retirement age, a draw to use up the standard deduction is a definite option. There is also a calculation of thinking the market is overvalued might as well get something to show for it. However yes in general if under retirement age and not qualifying for early distributions by no longer being employed you are most likely correct.
My investments are the followingmight as well
your 401k right now
Bought at $254 on Thursday. Up to $294 monday morning on news, down to $254 by the end of the day. Started today at $238, got as high as $292, ended the day at $275. Really difficult to put a good plan in place.
What's your interest rate on your home?
Mine is just below 3%. Not worth even thinking about taking out of my 401k to pay off that.
He's not talking about that or a very narrow fact set that would justify pulling money out of the 401k. He specifically said to pay down your mortgage. So no.
If
Its not a horrible idea, but we need a lot more information to be able to discern the overall implications. The interest rate of the loan, the amount to be taken out, The current tax brackets (which state living in) how much remaining until the next tax bracket, single/head of household/ joint.
You are making an assumption . . . so yeah details matter and at this point your information is incorrect. If there are situations where it is a decent to good idea, it negates your whole thesis of no.
I am using the thread title.
Taking out of 401k to pay off the mortgage
Unless he has a 25% mortgage rate it's a bad idea. There was one post earlier with a fact pattern that would potentially support taking a loan for up to 50k to pay off high interest credit cards. I gave that a like, but it is not "pay off the mortgage" which is the thread title.
I have seen at high as 8-9, and some operating notes in the 10's, credit cards much higher. In general I am against utilizing retirement, but I have in certain situations said it was a decent idea.
For now.
The problem here is that one cannot count on any hardship options. Every day things are being taken away.
This thread is about
Taking out of 401k to pay off the mortgage
it is not about paying off high interest credit cards.
Because to take all the tax and other hits to do this it wouldn't make sense unless you have a 25% mortgage.
10% hit plus claim it as income.
Plus that much less for retirement.
I would also recommend an annuity and universal life insurance.
Might as well go for the grand slam of stupid as F.
Plus that much less for retirement.
I would also recommend an annuity and universal life insurance.
Might as well go for the grand slam of stupid as F.
While you're at it, cash out the whole thing and put it in this amazing investment. You just need to then sell it to three of your friends, then they sell it to three of their friends, and after a while, we're all rich together!
And throw in a reverse mortgage also. Pull out the money from your 401k to pay off the mortgage then get into a reverse mortgage and live like a king!
While we’re at it, the Degen Thread is on a nice run with college BB betting lately. 🤷♂️
If you’re expecting major downturn, just put your 401(k) money into stable funds, or cash.
