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I'm just looking for a little advice. I'll be 59 and a half in October and could tap into my 401k without any penalties. Here's my situation, I'm retired and receiving a monthly pension check. For the last year I've been working as a contractor for the phone company from my home but that project will be ending at the end of September and my income will be reduced drastically. I have a mortgage payment of $717 and I owe about $86,000 on the house. It's a new 30 year mortgage and I just bought this house in January and I put down about $100,000 from the proceeds of my last house so of course I'm mostly paying interest at this point. I have about $135,000 in my 401k and it really hasn't been doing well lately due to the economy. Would it make sense to take my 401k and just pay off my mortgage? I would probably wait until January because next year's income will be much less and this year's income will be about $80,000 so I'd get hit with higher taxes if I did it this year. I know there's pros and cons to this idea but I could easily live on my pension without that mortgage because I have no other debts and in three years I can start getting social security. What do you think of this idea?
Since tapping the 401K will not present any hardships and you say with the mortgage paid off you can easily live off your pension then I would recommend you pay it off.
It sounds like you've thought about this and are planning it so you should have the least tax hit by doing it.
Nooooooooooooooooooooooooooooooo.
You will take a tax hit like you can't believe...! Right off the bat, your income for next year will be whatever you earn, plus $86000. The tax man will love you for it.
You would be better off starting to take money out in distribution to pay the $717. Then, no tax hit and you still have a write off.
You are wrong, there will definately have penalities in taxes. Talk to your tax man
You are wrong, there will definately have penalities in taxes.
Thanks for your advice. I do realize that I'm going to have to pay income tax on my 401k and income between the amount of $78,850 and $164,550 is taxable at 28% which I agree is a pretty hefty tax. Here's my thinking, when you pay a mortgage of $717 for 30 years it adds up to $258,120 which is also a large amount of money. You get a little break from the IRS for the interest you pay but it doesn't even come close to reimbursing you for the interest you're paying to the mortgage company. I think I will talk to a financial advisor but I've talked to them in the past and I realize that they're not necessarily looking out for your best interests, they're also doing this for a living and will try to steer you into an arrangement that will allow them to make a cut of whatever profit you're going to make. I want to look at every detail of the pros and cons of whatever choice I finally make because it's a very important financial decision that I'll have to live with. When you mentioned the idea of taking out just enough to pay the mortgage each month how would you go about doing that? Thanks.
First, you'll have to pay taxes on the 401k withdrawal.
Second, you will lose the tax deduction on your mortgage.
Third, you probably pay about 6% interest and you're 401k should be earning about 8% over time (I know the economy sucks but overtime it will even out since it's quite possible that you'll be around for another 30 years)
I would suggest making larger payments toward your mortgage if possible but don't touch the 401k.
what can you use the 401k on that wont get you taxed?
You will get taxed whenever you withdraw from your 401K, but not at the rate you would by drawing out an $86K lump sum in one year. That would jack your tax bracket way up there...!
I worked with a guy who couldn't wait to withdraw $30K when he retired, so he could buy a camper van to vacation in. He still crys himself to sleep at night. HUGE mistake.....
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