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If I wanted to withdraw from a 401k to pay off my mortgage, what is there to consider beyond the taxes and penalties?

I'm 36, and have $265k in a 401k with a previous employer. I have a home with $99k remaining on the mortgage. All I find is recommendations to not do this, based solely on the taxes/penalties, loss of future earnings, etc. If I'm willing to accept the loss (assuming around $40k), what else do I need to consider? Is there an alternative option for me?

I am considering this for two main reasons: 1) I'm worried of what the future may hold, and would like the security blanket of saying my home is "owned". 2) I've watched the 401k grow like crazy lately, and just imagine a correction where the money will simply disappear. So in my mind I'm taking out money that may not be there long-term anyway.

Assumptions: I'll stay in the house for at least 10+ more years. I'll continue funding any current 401k, at a minimum to get full employer match. I'll save or invest the majority of what my current monthly mortgage payment is ($609 with 20 years remaining).

Jul 29, 2014 by David from Rocky Mt, NC in  |  Flag
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2 votes

I agree with Curt about your allocation but even better would be an education in how the markets works. As well, you should look at what you need the money for, is it soley for retirement? If so, then I think you can probably stand to take the risk, you just need to understand why.

Also, do you have cash reserves or an emergency fund? If you had 6-8 months of you living expenses in cash sitting at a bank you might not be too worried.

Also, what is your opportunity cost? The markets beats the unlevered real estate in the long-term. Stay long and you'll be thankful when it comes time to retire.

Also, don't try to time the market, even the professionals can't do it. (Even if they say they can.)

3 Comments   |  Flag   |  Jul 29, 2014 from Minneapolis, MN

I agree w/ Curt & Phillip. If you're worried about the risk in your portfolio, adjust your assets within it, don't withdraw from it. Also, if you're 36, why are you so worried about a correction? You're going to experience corrections in your lifetime. If you keep your money as it is within the plan, you'll lose $ during the correction but the market will correct itself years later and you'll be back to where you were. Also, if you continue with regular contributions during the correction, you'll be getting mutual fund shares (presuming you're contributing to mutual funds within your plan) at a lower price that will appreciate as the market returns to normalcy. I'm 33 and experienced a big hit to my portfolio in 2008/09 but I didn't change what I was doing, I continued to buy during the drop and have had very good returns because I didn't react to the market. You're still young enough that you shouldn't worry about corrections. At most, adjusting the stock/bond mix would alleviate your concerns of loss.

Flag |  Jul 30, 2014 near Oak Creek, WI
Phillip Richard Christenson

Just another followup...A recession would actually be a very good thing for you in the long-term. If the markets correct 20% (for example) you can now purchase more stocks at a 20% discount. You are still in your earning/saving years so buying stocks when they are "on sale" is a great thing. Just another perspective to think about.

Flag |  Jul 30, 2014 near Minneapolis, MN

I have to agree with the above advisors. The awful truth is that a premature distribution from a 401k carries an inordinately large tax liability in both penalties and the likely higher marginal tax rate. In addition to your 20% penalty, let's say your income is close to the next higher tax rate level (the marginal tax rate). If you're at the 15% rate now, why expose the entirety of your withdrawal to a 25% tax rate? It just doesn't make sense.

Flag |  Jul 31, 2014 near Papillion, NE

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You should consider liquidity. Once you put money into the house it is very difficult to get it out. That is why you see all the Reverse Mortgage advertisements on TV.

If you are concerned about the risk inside your 401(k) consider an asset allocation that will reduce the overall risk of the portfolio. Talk to your employer about what educational materials they can provide you to help you re-allocate your portfolio...or talk to an objective financial advisor.

Comment   |  Flag   |  Jul 29, 2014 from Alexandria, VA

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