If your 401(k) or IRA gets caught up in a future downturn, Ramsey’s $1 million target may become unattainable. In other words, the DJIA has spent more than half the last 120 years recovering from crashes. When MarketWatch looked at the history of the time it’s taken for the Dow Jones Industrial Average (DJIA) to recover from crashes over the last 120 years, it found: And this math ignores the risk of a stock market crash. But you may think those returns unlikely over such a long period. In this case, you’d have to have a yield of roughly 10 percent on your $150,000 every year, for 20 years, to get to $1 million. Returns on your investments are not guaranteed This would leave you with only $567,000 at retirement – less than half the amount you might have had otherwise. On the other hand, say you start over and put every cent you save from having no mortgage payments into a new IRA. It gives an example of someone age 45 years with a $150,000 pension pot.īy cashing that in to pay off a mortgage, Ramsey reckons you stand to miss out on $1.75 million dollars in retirement, compared to if you’d put the money into an independent retirement account (IRA) and kept up contributions.Īnd even if you made no further contributions, you might have ended up with $1 million at the end of 20 years. Why using a 401(k) to pay a mortgage is a bad ideaĭave Ramsey’s website highlights the dangers of pulling from your 401(k) to pay off a mortgage. To give you a fair look at both perspectives, we’ve outlined the arguments for and against using a 401(k) to pay off a mortgage below. However, writing in Forbes in April 2020, Boston University economist Laurence Kotlikoff made the opposite case. We agree that using your 401(k) to pay off a mortgage is almost never the right move. Some money experts, like Dave Ramsey, say you should never touch your 401(k) to pay off a mortgage – unless the only alternative is bankruptcy or foreclosure. It’s true that there are two schools of thought here. The case against (and for) using 401(k) funds to pay off a mortgage “While you would not incur a penalty for early distribution of the funds from an IRA or 401(k) since you are over age 59½, any distributions you take and use to pay off a mortgage would be income to you and subject to tax.” When The Washington Post addressed this very issue in 2019, it consulted Julie Welch, a CPA and personal financial planner in Leawood, Kansas. Once you’ve passed the magic age of 59½ years, you no longer have to pay a 10 percent penalty for withdrawing funds.īut the tax implications remain the same. Withdrawing 401(k) funds when you’re over 59½ years
The extra ‘income’ might even push them into a higher tax band.Īdd those taxes to the 10 percent penalty, and you’d lose anything between 30 percent and half of the funds you took out. There’s also a tax hit during the year the withdrawal is made.Įvery cent taken out would be taxed in the same year at the individual’s normal tax rate. That’s a $100 fee for every $1,000 taken out.
Typically, those who haven’t reached 59½ must pay a 10 percent penalty money withdrawn from their 401(k). These penalties apply to 401(k) withdrawals rather than 401(k) loans. (At least, if you’re younger than 59½ years.) Leaving aside your depleted retirement savings, there are more immediate financial implications when you withdraw money from your 401(k). The returns you’re missing out on are much larger than the original sum withdrawn. If your 401(k) accrues interest at a rate of around 10 percent, the money you’re taking out could potentially have doubled itself 3 to 5 times over. Not only are you removing a lump sum from your retirement account, but you’re losing years’ worth of accrued interest on that money. The main reason not to use your 401(k) to pay off a mortgage is that it takes funds away from your retirement nest egg.
The case against (and for) tapping your 401(k).Dangers of using your 401(k) to pay off a mortgage.But first, here’s what you need to know about using your 401(k) to pay off a mortgage. There are plenty of ways to pay off your mortgage early without touching the money you’ve saved for retirement. Because doing so is very likely to cost you dearly in the long run.Īnd, dipping into your 401(k) is rarely necessary. Well, think very carefully before you do. Octo10 min read Paying off a mortgage with 401(k) funds? Almost always a bad ideaĪre you thinking of withdrawing money from your 401(k) to pay off a mortgage?
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