Pros and cons of liquidating 401k
Savers must find methods to outpace inflation while balancing the risk of retirement plan investments.Contribution limits are in place that cap the total amount that can be saved in any given year, further increasing the challenge.The tax scenario is no better if you borrow from your 401(k) in order to discharge the mortgage, rather than withdraw the funds outright from the acoount.Withdrawing funds from a 401(k) can be done through a 401(k) loan while an employee is still employed with the company offering the plan or as a distribution from the account.The cash flow increase resulting from no longer having a mortgage payment may be quickly depleted due to increased saving to make up a retirement plan deficit.If you're already retired, there is a different kind of negative tax implication.Here, though, is a rundown of the pros and (compelling) cons of the move, to help you decide whether it might make sense for you.For younger investors, eliminating the monthly mortgage payment by tapping 401(k) assets frees up cash that can be used to meet such other financial objectives as funding college expenses for children or purchasing a vacation property.
"I’ve seen some people step themselves all the way up to [the] 39.6% [bracket]," Swanson says, recalling the days before the Tax Cut and Jobs Act reduced the top bracket to 37%.
However, this advantage is strongest if you're barely into your mortgage term.
If you're instead deep into paying the mortgage off, you've likely already paid the bulk of the interest you owe.
They're understandable questions as you plan for retirement: Is it sensible to be squirreling away money in an employer-sponsored retirement plan such as a 401(k) while simultaneously making a hefty monthly mortgage payment?
Mightn't you be better off in the long run to use existing retirement savings to pay down the mortgage?
The asset-protection benefits of paying down a mortgage balance may far outweigh the reduction in retirement assets from a 401(k) withdrawal.