Paying Your Mortgage with Your 401k

Paying Your Mortgage with Your 401k

If the company you work for offers a 401K retirement plan and you’ve been faithfully paying into it on a regular basis, you’ve probably got a tidy sum of money. It’s really tempting to look at that money at 29 or 39 years old and think of all the things you can spend it on. This is especially true when you are facing possible foreclosure on your home mortgage. Should you use those retirement benefits to keep your house or even to pay off your mortgage?

The 401k

The 401k, a retirement plan offered through many employers, is one of the most valuable assets you have. The money that funds the 401k is tax-advantaged. That means that all the money going into your plan is taken out of your paycheck BEFORE taxes. This means that you pay less in taxes on your take-home pay. This saves you money now. You also do not pay taxes on the earnings on your 401k. Once you retire and start taking out money, you do pay taxes on that 401k money. However, since your tax bracket has probably dropped, you’ll likely pay less in taxes.

The kicker comes if you withdraw money before retirement. You get to pay both taxes and penalties for taking out that money. Before you withdraw money from a 401k, always discuss it with a tax professional, like a CPA!

*** We are not tax professionals and are not giving tax advice. Before you make any financial decisions, we encourage you to contact a tax professional.**

The 401k Mortgage Dilemma

Your house is probably the single largest physical asset you’ll ever own. Tax professionals report that many people consider using their 401k to pay down their mortgage, especially if they are 59-½, and give themselves more money each month. The answer, for most people, is that it does not make sense to pay the taxes and penalties. However, if you are in this situation, talk to a tax professional.

If you are facing foreclosure, you are in a slightly different situation and may be able to use your 401k to keep your home from being foreclosed. Foreclosure puts a huge hit on your credit report, and it may be years until you recover financially. If you are in this position, here are some things to consider.

Using Your 401k To Pay Off Your Mortgage

Your 401k can be used for financial hardships. If you are still employed by the company and are either 59-1/2 or in financial hardship, you can take out enough money to cover the amount to bring your mortgage current plus the amount for taxes and penalties. The IRS charges 10%, so a $5,000 401k hardship withdrawal will cost you $500, plus taxes.

In order to use your 401k, you need to fall into specific categories.

  1. Do you still work for the company where you have your 401k?
    1. Yes – go to number 2
    2. No – go to number 3
  2. Are you facing foreclosure or are at least 59- ½?
    1. Yes – You can take out money
    2. No – You cannot take out money without significant taxes and penalties
  3. You no longer work for the company or are under 59-½
    1. Yes – you may take out money but may face taxes and penalties

The often-unrealized penalty for early withdrawal is the decreased earning power that your 401k will have. The money that you withdrew will not be there drawing interest. This may not affect someone early in their career but can financially harm someone at the end of their expected working life.

Another wrinkle to consider is that your 401k is protected from creditors. Your home equity is not 100% protected.

Speak to a Pacific Debt Specialists for FREE to hear your options.

An Alternative to Using a 401k to Pay off A Mortgage

Your 401k may allow you to take out a loan against 50% of the vested account balance. This option requires you to repay the loan within 5 years. This has some advantages, so talk with a tax professional to make certain you can repay the loan and that the advantages work out in your favor.

What If You Use IRA To Pay Off Mortgage?

An IRA is another type of retirement account. Like the 401k, it can be used under certain situations. BUT most tax professionals advise strongly against it. The taxes may eat up most of your withdrawal, the withdrawal may push you into a higher tax bracket, and you may end up owing the IRS money.

Pacific Debt, Inc.

If you are facing foreclosure and have more than $10,000 in credit card debt, contact Pacific Debt, Inc. We may be able to help you become debt free in 2 to 4 years. We have settled over $250 million in debt for our customers since 2002.

Pacific Debt, Inc is accredited with the American Fair Credit Council and is an A+ member of the Better Business Bureau. We rate very highly in Top Consumer Reviews, Top Ten Reviews, Consumers Advocate, Consumer Affairs, Trust Pilot, and US News and World Report.

Pacific Debt is currently providing debt relief coverage in the following states:

Alabama, Alaska, Arizona, Arkansas, California, District of Columbia, Florida, Iowa, Idaho, Indiana, Kentucky, Louisiana, Massachusetts, Maryland, Michigan, Missouri, Mississippi, Montana, North Carolina, Nebraska, New Mexico, New York, Oklahoma, Pennsylvania, South Dakota, Texas, Utah, Virginia, Wisconsin

For more information, contact one of our debt specialists today. The initial consultation is free, and our debt experts will give you all your options.

How Katherine in Michigan Retired Debt Free

Name: Katherine

Age: 62

Location: Michigan

When did you enroll in our debt settlement program and how much debt were you facing?

I had about 23,0000.00 worth of debt with 2 credit cards.

Why did you choose Pacific Debt over the options and companies you researched?

When I was looking for a company, basically, I went thru and saw Pacific Debt, I called and was put in touch with Josh Hallas.  In just speaking to him and his reassurances, I knew this was the company I was supposed to deal with.  Josh explained the company and just what we would have to do and he sent me the paperwork, and that was that.

Debt Relief Review

Tell us about your journey through the Pacific Debt program? Are there any special team members you would like to recognize?

I have had Josh Hallas primarily throughout my whole journey.  There was another gentleman that I was dealing with, but then I was transferred back to Josh.  The last person I dealt with was Bethany R.  She was very helpful, but I was always transferred back to Josh.

How does it feel to be debt free? What are your financial goals moving forward?

It feels like a weight has been lifted off my shoulders and now I can retire knowing that I don’t have any financial debt hanging over my head.  That was and still is my primary goal.  Without the help of Josh and the other folks that had my case, this probably wouldn’t have been possible  – for me to retire without any debt.  I want to thank all the people at PDI who were there for me when i needed that little push to get myself out of a sticky situation.  I would recommend PDI to anyone who was in the situation.

We know we are not perfect. What suggestions or advice would you offer to help us improve our program? All advice is welcome.

I can’t think of anything that you would need to change, all of your people are very kind, courteous and helpful.  I thank them all from the bottom of my heart!!

Thinking about Retirement? Get a Handle on Your Debt First!

No one likes to be in debt. It’s more difficult to find the money to spend on the activities that you love and the items that you want. Just imagine how much more difficult it will be if you find yourself retiring with a lot of debt attached to your name. Not only will you have less money to spend on daily necessities, but you’ll also have less income to help you pay down the debts that you have accumulated or make the purchases that you want. This scenario provides the best reason to get a handle on your debt now while you are still earning an income.

Carrying Debt into Retirement

The fact that people are living longer than ever today  means that you need to handle your finances better and make smarter moves regarding your retirement savings. According to the Consumer Financial Protection Bureau, a higher percentage of homeowners are facing retirement with mortgage debt attached to their financial situation. In fact, the percentage of people with mortgage debt went up from 22% to 30% between 2001 and 2011 for homeowners aged 65 and older. When looking at homeowners older than 75 years of age, the numbers increased from 8.4% to 21.2%.

You might be wondering what that has to do with you if you aren’t even close to 65 years of age. The truth is that these individuals didn’t suddenly find themselves in debt. It’s something that they carried with them throughout the years, picking up new debts along the way. Perhaps they carried debt from their 20s into their 30s and then into their 40s and 50s. It only stands to reason that they are going to still have at least some of that debt in their retirement years.

Taking Control of Your Debts

Rather than finding yourself in the same type of situation, you might want to consider getting your debt under control now instead of taking it with you into retirement. After all, you’ll want to make sure that you can live comfortably once you stop working. If you find that you have more debt than you can reasonably handle now, you need to find a way to get rid of it before you retire.

“It’s important for consumers to realize that the best time to begin saving is the present. It doesn’t matter how old you are. It only matters that you begin to put your money away so that you will have it when you need it,” says the CEO of Pacific Debt. “While retirement might seem like it’s far away when you’re only 30, 40, or even 50, the truth is that it is a lot closer than you think, particularly if you have a pile of student debt, credit card balances, and car loans. Add to that a mortgage, and you are going to find it nearly impossible to put any funds aside for the sole purpose of financing your retirement years.”

debt free retirement

According to the Employee Benefits Research Institute (EBRI), families having a head of household between the ages of 55 and 64 have debt levels that are higher than any other category. Their average level of debt in 2010 was more than $100,000. They certainly didn’t amass that amount overnight, and they probably started creating that debt a few decades earlier. If you don’t want to fall into the same type of situation, you need to consider paying off the debt that you have now instead of allowing it to grow larger and larger.

A Carefree Lifestyle Now Leads to a Less-Than-Carefree Retirement

Results from a recent research study conducted by the Insured Retirement Institute (IRI) suggest that confidence in the ability to have enough money to survive ten or twenty years without an income from employment is failing among Baby Boomers as a whole. In fact, the report discovered that as little as 27% of this grouping of adults feel sure that their savings will carry them through retirement. These results suggest a trend in the making, one that leads to fewer and fewer consumers of all ages feeling confident that they can enter retirement with a carefree attitude.

The CEO of Pacific Debt recognizes that life constantly necessitates change. He offers the following reflection, “When the economy is bad or you discover that you’ve spent more than you can reasonably afford to pay back on time, you need to modify your spending habits so that you can manage your debt responsibly. While it might be easier to say “Tomorrow’s a new day, and I’ll worry about it then,” it isn’t a wise decision, because eventually, you are going to run out of tomorrows.”

how to get out of your debt before retirement

Getting Rid of Your Debt Now for Easier Retirement

Your ability to borrow money decreases as you retire, simply because your debt-to-income ratio changes considerably. This number is calculated by taking the sum of your monthly debt payments and dividing this number by your gross monthly income (the amount of money you have available after taxes). Since your income is generally lower during your retirement years than when you were working, your debt-to-income ratio is probably going to be less than optimal.

how to get out of your debt for easier retirement

“People need to start thinking about retirement well before it is looming on the horizon,” says the CEO of Pacific Debt. “Getting out of debt and staying out of it while you are still young enough to earn a decent income is critical to planning a comfortable lifestyle once you retire. Looking into a debt settlement and resolution program can help you to do that.”

Repaying your debts while you still have your health as well as your employment is a wise decision. You’ll have less difficulty now than you will when you are older, partly because the likelihood of health problems increases as you age. Don’t allow payments toward older debts to become a hardship that prevents you from enjoying life more readily.

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