Losing job. have enough to pay off mortgage with 401k. should I cash out and pay it off? have 25yrs to ret.?

Question

I am getting laid off in a few months. I have enough to pay off my mortgage in my 401k. should i pay it off? my interest rate on my mortgage is 7.8 fixed. I still have 25 yrs to retire.

Answer 1

If you withdraw money from your 401(k) you will be liable for taxes and penalties of about 40%.  Plus you will lose all of the growth that your 401(k) would have made, compounded, over the next 25 years. This means that your 401(k) would likely have quadrupled in value during that time.

Answer 2

I would say no. Cashing in usually has a heavy penalty. You might end up with half the money after tax and penalties.I assume your 401K is down now, as well, so it has opportunity to grow considerably.

If you are going to need money for your mortgage, I think it would be more productive to get started looking for a new job. Then you can "Roll" your money into an IRA. Be sure to roll it over, if they send you a check, you will be taxed on it. Talk to your HR people to find out how to roll it over, and find an IRA account.  

Answer 3

I agree with those who advise against closing your 401k.  Save all you can during the remaining months at your current job in case you don't get hired by another company before the layoff.  

Find out what unemployment benefits would be and put together a budget based on that income.  Unemployment along with your savings may be able to tide you over until your next job.  Use your 401k only as a last resort.

You can download a free budget workbook from:  http://www.bills.com/guide/

or use an on-line tool at: http://www.kiplinger.com/tools/budget/

God bless.

Answer 4

Check into the tax implications - you will have to pay income tax on the money you take out of your 401K.

Answer 5

The only way you should do this is if you will not have sufficient income to make your mortgage payments.  When you cash in a 401K, there is an automatic 10 percent penalty for doing so, plus you will need to claim this income as regular taxable income on your 2008 income tax return.  Thus, if you cash in a $100,000 401K, you will pay a $10,000 penalty, plus income tax on whatever bracket you are in.  If you are a 20 percent bracket person, there goes ANOTHER $20,000 to the feds, plus state income tax as well, if your state has an income tax.

Answer 6

No, your 401(k) is your retirement...consider how much you can earn on that money in 25 years that you fore go by drawing it out.  Also, you would have to pay taxes and a penalty for early withdrawal.

Since you have a nice notice before getting laid off, I would suggest that you spend as much time as possible looking for new employment.

Answer 7

Can you take a loan out from the 401K instead of a redemption?  If so why not just borrow a few thousand to get you through when the time comes.  You ARE already looking and submitting applications everywhere you can aren't you?

Can you refi the house and get a better rate?  then again it is that high for a reason.