I am 65 years old and just purchased a 10-year mortgage; is it wise to withdraw from my 401(k) when I retire in one year to pay off my mortgage?
I am 65 years old and just purchased a 10-year mortgage. When I retire at age 66, I want to withdraw enough money from my 401(k) to pay off my mortgage. I only have a car payment, as far as other debt. With my other retirement accounts, I will have enough. Is withdrawing from my 401(k) a wise thing to do?
No, it's not. Make the payments on time and retire that mortgage in 10 years. This will defer taxes on the 401(k) -- or rollover IRA, really -- until the year the money is withdrawn, and might result in a lower tax rate on all of it Much better to withdraw over 10 years than to pay it all at once. Just make sure that your investments produce a higher return than the interest you are paying.
Think long and hard before you do that.
First, any money taken out of your 401k is going to be added to your income for the year, and taxed along with it a regular income. Paying off the house will require a sizable lump sum distribution, all of which is going to be taxed at whatever your final income tax rate ends up being.
Second, the interest you pay on the mortgage is tax-deductible in most cases.
Third, the loss of gains in the 401k for 10 years will almost certainly be greater than any savings in interest you are making by paying off the loan early. Mortgage loans, especially a 10-year note, will have a pretty low interest rate (and again, that interest is usually tax-deductible anyway). Let's say you are paying 3% on this mortgage. Is that savings greater than the rate of return your that same money would earn in the 401k over the same 10 years? Most likely, the money would be much more by leaving it in the 401k, than by paying off the home.
If you plan to retire before the loan is paid off, you can always roll your 401k into an IRA and have the IRA supplement (or even fully pay) the mortgage each month. That's just a small amount coming out of the IRA each month (as the full balance continues to grow tax-deferred).
A rule I always give my clients is, take as little out of your retirement as you can, as often as you need to. This is instead of taking out huge amounts you may or may not need and losing the tax savings and future growth potential.
Without knowing the balance of the mortgage, your current tax rate, how much you make, the interest rate on the mortgage, what your other income is currently, and the balance of your 401(k), I cannot answer this question specifically. I do doubt that paying off the mortgage early with a large withdrawal from your 401(k) is a wise move because of the additional taxes it might cause. Simple rule of thumb. If the debt for an asset is at an interest rate less than the return you would make investing the money for the same period, then don't pay of the debt early. It will cost you money. Add to this simple rule of thumb the fact that the withdrawal from your 401(k) would be taxed at ordinary income, would make this idea even worse.
I would encourage you seek out a “Fee only” independent Registered Investment Adviser (RIA). RIA’s are fiduciaries and will have your best interest at heart. Find one who is a Certified Financial Planner professional ™ (CFP®). You can find advisers at the following websites:
National Association of Personal Financial Advisors - https://www.napfa.org/financial-planning/how-to-find-an-advisor
Financial Planners Association - http://www.plannersearch.org/
XY Planning Network - https://www.xyplanningnetwork.com/
Probably not but it depends primarily on 2 things: Your tax bracket and what your account is earining compared to the mortgage rate. Here are the questions to ask yourself?
1. How much will my taxes be in the year I pull the money out? If you are pulling out $300,000, yikes! You'll have a tax bill. if the mortgage balance is $20,000, may not be an issue. If some of the money is in a Roth 401k, then there wouldn't be a tax hit. You could have your accountant calculate how much you can pull out and stay in a lower tax bracket and then withdraw that amount each year and turn that 9 year payment plan into 3 or 4.
2. What is your portfolio averaging? If your mortgage rate is 6% and your portfolio earning 5%, paying it off is a good idea if the tax bill isn't going to be huge. If your rate is 3% and you are getting 6% on your mortgage and can still afford the payments, then it's probably in your best interest to keep it in the 401k.
I get the desire to be debt free but it has to make financial sense not just emotional relief!
I PS. If your car interest is higher than your mortgage interest, pay that off first!
Congratulations on retirement!
There are a couple things to consider when making this decision:
- What will be your sources of income in retirement and what marginal tax bracket does that put you in? Any money you withdraw from your 401(k) (assuming its a traditional 401(k) with only pre-tax contributions), will be taxable and a large withdrawl could push you up into a higher marginal tax bracket.
- How much is your monthly mortgage payment, balance & interest rate? Are there any early payment penalties? If both are low and you can afford to continue making the payment with your retirement income, it may make sense to pay off using the current schedule.
- What are your current deductions? Will you use the standard deduction or itemize your deductions? Does the interest deduction help you?
- What are your outside assets?
I hope these questions get you thinking. I would recommend reaching out to a fee-only financial advisor that works on an hourly basis to help with these questions. In that case you can have a comprehensive review and not have to worry about conflicts of interest or investment management considerations.
All the best!