Submitted by admin on Fri, 09/10/2010 - 03:21
Most people think that there's no harm to borrow from the 401k account to pay off mortgage. However, it is not a good option to tap the retirement funds to pay off home loan balance. This is because when you borrow from a 401(k) plan, you can relieve yourself from the pressure of one emergency and create another pressure for yourself.
Reasons why you shouldn't tap 401k to pay mortgage
- Tax Penalty: Most employers impose restrictions on withdrawals when a person remains in service with the company and is under 59½ years of age. If you withdraw money from your 401k account before the age of 59½ years, you'll be subjected to an excise tax which is equal to 10% of the distribution.
- Short term withdrawal: You can borrow money from your 401k account for a short term. You're expected to pay back the money within 5 years. In case, you lose your job, you have to pay it back within 90 days. If you fail to pay the money back on time, you have to pay tax on everything you owe. Most people think that they'll be able to pay back the money within 5 years. However, it's better to think that if your mortgage is un-affordable now, there are chances that it might be un-affordable few years later as well. Thus, repaying a 401(k) loan may be tougher.
- Borrow partial amount: You can't borrow more than half of what's in your 401(k) account. However, the rules for 401k loans may vary depending upon individual employers as well as Federal laws.
- Unable to earn interest on your savings: As you withdraw money for your 401(k) account, you won't be able to earn as much interest for up to five years as you may have earned if you had kept the money in the account.
- Jeopardize your old age: Many of us fail to realize what we do to our future if we borrow money from our 401(k) account. If you don't save money for retirement, you'll jeopardize your old age and might become a burden to society. It's better to have lump sum money in the retirement savings rather than becoming a burden on the society.
Thus, in my opinion, if you're facing hardship in paying your mortgage, you should contact the lender for loan modification. If the lender accepts your request, he will give you a repayment plan which will help you in paying off the mortgage in an affordable manner. This will be a better solution than tapping your 401k account.