The economic crisis has tightened everyone’s belts, and some people are still having trouble paying their mortgages. One option is to cash in your retirement plan to pay your mortgage, but is this wise?
Most financial experts will tell you that this is the worst thing you can possibly do, but there are instances where there are no other viable options. When you don’t have any money coming in or when your mortgage payment skyrockets, your retirement plan might be your only recourse.
Examine Your Situation
Steve Bucci of BankRate.com suggests that it is always a bad idea to cash in your retirement plan to pay your mortgage. He cites several reasons for this, including double the tax penalties and the danger of retiring with no savings to fall back on. However, what Bucci doesn’t address is situations in which there is no other choice.
If you have other options to pay your mortgage, leave your retirement plan alone. It is better to use credit cards, a personal loan, money borrowed from family members or your savings account (or other investments) than to cash out your 401(k). However, if you are completely strapped for cash, your retirement plan is certainly a viable option. You’ll just have to work twice as hard to get it back up to the original balance before you retire from your job.
Consider Job Security
If you cash in your retirement plan to pay your mortgage, you should know that job security plays a significant role. With many of the nation’s largest companies filing for bankruptcy or laying off employees, jobs are not nearly as secure as they once were. Unfortunately, if you borrow from your 401(k) to pay your mortgage and you get fired (or quit), you’ll have only 60 days to pay the loan back.
It isn’t a good idea to cash in that retirement plan if you think you might lose your job. This could upset your finances for many years to come, and is especially dangerous for older workers. In this case, it is much better to sell your home and find a house to rent than to risk your entire financial future.
Talk to a Credit Counselor
You might have options you haven’t considered. Before you cash in your retirement plan to pay your mortgage, talk to a credit counselor or adviser who can address your particular situation. He or she might be able to uncover a solution you haven’t thought of, in which case you’ll save a boat-load of money and your future will no longer be in jeopardy. And even if you do have to cash in your 401(k), a credit counselor can help you develop a budget for paying it back that will help you get back on track.
Withdraw or Borrow?
There are two ways to cash in your retirement plan to pay your mortgage. The first is to borrow against the principle, which means taking out a loan on the 401(k) and paying it back over time (plus interest). The second is to take an early withdrawal of your retirement plan, which has significant tax penalties and can result in financial destitution in the future. However, you will probably walk away with more cash if you choose the second option.
The best way to make this decision is to look at the math. Have your credit counselor or accountant go over the numbers with you, comparing the consequences of borrowing or withdrawing from your retirement plan to pay your mortgage. This is the most efficient way to approach the problem, and will show you what will happen over the next several years depending on which you choose.
Steve Bucci, Pay off second mortgage with 401(k) loan? No!, BankRate.com