Whether you should borrow from a 401(k) to pay off a house depends upon a number of factors, including how close to retirement you are, how much your mortgage balance is, how much you have in your 401(k) and the terms of your 401(k) plan. Should You Borrow from a 401(k) to Pay Off Your House? Keep in mind that if you pay off a mortgage with a 401(k) after retirement, you can do so without taking out a loan and without paying the 10 percent tax penalty, as long as you're 59 1/2 or older. For example, if you have a $150,000 mortgage balance and you have $200,000 fully vested in your 401(k), you can only borrow $50,000, and so you'll still have $100,000 left to pay on your mortgage. If you have a low mortgage balance and a substantial 401(k) balance, you might be able to pay the mortgage off, but because of the limit on how much you can borrow, paying the mortgage in full is unlikely. Paying off a mortgage is one reason you might borrow from a 401(k). Can You Borrow From a 401(k) to Pay Off a Mortgage? If you don't pay the loan back within the required time, the remaining balance of the loan will be treated as an early withdrawal, and you'll have to pay income taxes plus the 10 percent penalty, if applicable. If you leave your employer, however, you must pay the loan back within 60 to 90 days, depending on your plan. Most 401(k) plans require that you pay loans back within five years. How Long Do You Have to Pay Back a 401(k) Loan? However, not all plans will permit you to do this. There is an exception in some plans: If your account balance is $20,000 or less, you can borrow up to $10,000, even if it's more than half. This means that if you have a vested balance of $400,000 in your 401(k), you can still only borrow $50,000 or less pursuant to IRS rules. You can only borrow up to 50 percent of your 401(k) account's total vested value, and no more than $50,000. How Much Can You Borrow From Your 401(k)? The money you take from a 401(k) loan is not considered taxable income, and so it isn't taxed, and it isn't penalized as an early withdrawal. Your repayments will come back out of your paycheck. Since the money in the account belongs to you, you're essentially borrowing money from yourself, and the interest you pay back goes into your account. How Do 401(k) Loans Work?Ī 401(k) loan is a loan you take from your 401(k) account, which you pay back with interest. However, the penalty is also not assessed if you take out a 401(k) loan. You may avoid this penalty if you leave work during or after the year you turn 55 and withdraw the funds then, or if you're totally and permanently disabled. If you withdraw funds before you turn 59 1/2, you'll have to pay a 10 percent penalty in addition to the income tax. If you're 59 1/2 or older, you can withdraw money from your 401(k) without penalty (although you will have to pay taxes on the withdrawals since you didn't pay taxes on the income you used to fund the account). Withdrawing From a 401(k) Planīecause your 401(k) is intended for retirement, and because you're receiving the tax-deferral benefits, you generally cannot withdraw funds from your 401(k) before you reach the age of 59 1/2. Because of this, the IRS puts strict limits upon when and how you can take money from your 401(k). This tax deferral is a benefit because it allows your contributions to accrue interest and grow tax-free. Tax Deferral Benefits of a 401(k)īecause the money for funding your 401(k) is taken from your paycheck before taxes, it allows you to reduce your taxable income now and pay the taxes later. When you retire, you can take money out of the account to pay for living expenses, and you pay taxes on it, just as if it were earnings from a job. Most 401(k) plans work in basically the same way: Your employer takes a percentage of each paycheck, before taxes, and deposits it into your 401(k) investment account, where it accrues interest over the years. You can only get a 401(k) through work you cannot create one on your own. What Is a 401(k)?Ī 401(k) is an employer-sponsored retirement account, named after Section 401 of the United States Tax Code. You can't borrow more than $50,000 from a 401(k) in any event. Borrowing from your 401(k) to pay down a mortgage is a simple process your particular circumstances will determine whether it's a good idea.
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