Liquidating 401k to pay off mortgage
Should You Pay Off Your Home Mortgage With Your K
An even larger loss from liquidating your K is the future earnings on the funds withdrawn. When funds are taken out of a k to pay off a mortgage balance, the investment opportunity on these assets is lost until they are replenished, if they are replenished at all. Saving toward retirement is an overwhelming task for most, even when a k is available. Among the considerations are the amount of assets a person has at the time he retires, which required expenses remain, and which expenses increase or decrease.
Transfer balances to lower interest credit cards. While there are exceptions to the withdrawal penalty, paying off a mortgage balance is not one of them. With numbers that high, it's tempting to withdraw k plan funds that seem to be sitting around collecting dust until retirement.
Any money taken out of the k is counted as ordinary income. Due to these restrictions, a reduction in a k balance may be near impossible to make up before retirement begins. You can't withdraw these funds because your employer contributed the money for the sole purpose of your retirement. The greatest caveat to using k funds to eliminate a mortgage balance is the stark reduction in total retirement assets.
Alternative Methods to Reduce Debt There are numerous options to reduce debt and interest rates. The combination of personal contributions and employer matching if you get it provides individuals with the opportunity to set aside savings for the long term in a tax-advantaged way.
Make extra payments to reduce interest charged and loan length. Then you need to figure whether the cost in taxes and reduced funds at retirement will end up worth it. You should pursue these objectives independently, not sacrifice one to obtain the other.
Regardless of the length of time it will take for your tax penalty to be repaid, taking out money from your k won't make sense. The Bottom Line There's an emotional effect that kicks in when you begin to view your k as accessible money. In addition, several law firms specialize in class action suits against employers who abuse their K programs.
Carefully calculate how much interest paying off your mortgage will actually save. Decreased Rate of Return Homeowners should also consider the opportunity cost related to paying off a mortgage balance with k assets.
Tax Implications Withdrawing funds from a k can be done through a k loan while an employee is still employed with the company offering the plan or as a distribution from the account. Looking ahead to retirement, your objective should be to accumulate a K nest egg of financial assets as large as possible, and pay off your mortgage as soon as possible.
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