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Withdrawing from 401k to pay off a mortage.

I am confuse in which way I should go. In six month I will be turning 59 1/2. I currently have about 800k in my 401k in addition, I have a mortgage of about 74k. Also, I am within 3 years from retiring. (currently employ). I average about 100k/yr. I would like to make a one time withdrawal of about 74K to pay off the mortgage. I understand that I would need to pay the taxes on the 74K.

Apr 30, 2016 by Edwin from Fresh Meadows, NY in  |  Flag
4 Answers  |  6 Followers
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Edwin,

I tend to agree with both Gary and Davin. Gary has provided the general rule of thumb and Davin's request for more detailed information is appropriate to provide a specific more detailed answer to your question. However, the bottom line is that speaking with a Certified Financial Planner when dealing with a decision that will have long-lasting consequences is the right move to make.

Comment   |  Flag   |  Jun 21, 2016

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Gary Ray Duell Level 18

Edwin, there are a lot of moving parts to your plan. But the general rule of thumb I use is that you should not pay off the mortgage if its net cost is lower than a safe investment rate of return. I know. Jim Cramer yells about the absolute evil of debt, to be paid off at all costs and above all other priorities. However, if your mortgage interest rate is, for example, 2.75% then after Uncle Sam's credit it could be as low as 2%. You can easily earn a tax-deferred ROR of 3% so, in this example, you wouldn't want to pay off the mortgage. And this assumes you have ready cash. The tax impact of withdrawing $74k would tilt the equation even further in favor of keeping the mortgage. The bottom line: Find a holistic, fiduciary adviser who has experience calculating this type of interest rate arbitrage.

Comment   |  Flag   |  May 04, 2016

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While I don't know your specific situation, in general I don't favor raiding retirement funds to pay off your house. You generally won't be able to replace those funds, and the tax that must be paid beyond the mortgage payoff is so significant as to substantially negatively impact retirement for most people. I'd encourage you to get with a good planner before you pull the trigger on such an idea.

Comment   |  Flag   |  Dec 09, 2016

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Davin J Carey Level 1

Edwin,

I saw this comment regarding your 401k and also another post about an annuity. It seems like you need an advisor to help sort this all out for you and I'm not sure a message board will provide the best resolution.

Would you be able to email me so I can perhaps help more deeply? Davin.Carey@TaxWealthPlan.com.

3 Comments   |  Flag   |  May 02, 2016 from Ventura, CA
Edwin

That is correct. However, the message board can give me a better understanding in which professional I will go. Thanks in advance for your input.

Flag |  May 02, 2016 near Fresh Meadows, NY
Davin J Carey

It's nearly impossible to give "good" advice knowing so little about your overall plan. The best advice I can give with the limited information available is if your goal is to pay off your mortgage, I would recommend you increase your monthly mortgage payment so that it is paid through normal payment + additional principal payments from income rather than taking a distribution from your 401k.

Flag |  May 03, 2016 near Ventura, CA
Davin J Carey

If that is not possible, I would likely wait until the calendar year after you retire to make a distribution from 401k/IRAs as your taxable income will potentially be much lower, reducing the overall impact $74,000 (or whatever the number is at that time) of additional taxable gross income would be.

Flag |  May 03, 2016 near Ventura, CA

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