Is it a smart move to close my 401K and with that money pay for my new house in cash?


By admin ~ October 22nd, 2009. Filed under: General.

Is it a smart move to close my 401K and with that money pay for my new house in cash?

I am 34 and I believe I have at least 30 more years to get a new 401 K going on and establish again good numbers in it :-). Also, I do have Roth IRA and I intent not to pay tax when I start withdrawing after some 30 years of rent/mortgage free life.
I am ready to pay any tax and penalty (10%) on my existing 401K withdraw based on my tax bracket.
Anyway, I better pay those taxes in times when they are low..like now.
The concern I have is that every personal finance article says not to touch 401K before retirement.

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3 Responses to Is it a smart move to close my 401K and with that money pay for my new house in cash?

  1. admin
    October 22nd, 2009 at 12:06 am
    If you withdraw your funds, you'll pay a total of 35% in add'l taxes. If you have a fixed rate open end mortgage, you can pay it down anytime without being penalized. On the first 15 years on a 30 year mortgage, you pay about 70% in interest. Think hard before you do it because once it's done, you can't take it back.
  2. admin
    October 22nd, 2009 at 12:06 am
    Well, yeah. You are going to need that money. The general consensus is save it for when you NEED it, not just when you WANT it. If something were to happen and you couldn't work or something, you would really need that money and you'd be glad you had it. If I were you, I wouldn't do it. It's not there to make things easier or happen quicker; it's there to safeguard you in case you need it.

    Look at it like this: you buy the house with the 401k. Then, like a year later, God forbid, you get in an accident and you can't work for months. Who will pay your bills? Your mortgage? Car payment? How will you get food? The 401k might not be enough to pay for all those things for months but it sure would help. You might say, "Well, I'd just sell my house." A lot of people thought that. Look at them now. The reason why you shouldn't touch it is because you don't know what will happen. You believe you have 30 more years to work but what if you don't?

  3. admin
    October 22nd, 2009 at 12:06 am
    Typically you cannot withdraw from a 401k if you are still working for that employer, so to even consider that it would likely have to be a 401k from a "former" employer.

    Note that any past already taxed "contributions" can be withdrawn from a Roth IRA with no futher tax or penalty. But you would be giving up future potential compounded growth of that money. Any gain withdrawn would be subject to tax/penalty.

    When IRA's first started many years ago, there were often projections that investing a certain amount per year from age 25 to 35 would gain as much, if not more, than someone investing the same per year from age 35 to 65. So if you get a later start, you have to sock more away. But without home payments maybe you can handle that.

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