Pay Off Your Mortgage With 401(k) Funds?
Earlier this week, I ran across an article about a new piece of legislation being promoted by two Georgia Congressmen who want to allow people to pull money out of their retirement accounts to pay down their mortgages.
Dubbed the Hardship Outlays to Protect Mortgage Equity (HOME) Act of 2011, the legislation would allow homeowners to withdraw up to $50k or half of the account value, whichever is smaller, without paying the usual 10% penalty. In short, you’d have to use the funds to make mortgage payments within 120 days of receiving the distribution.
You can read the text of the bill here: HOME Act of 2011
The sponsors, Sen. Johnny Isakson and Rep. Tom Graves, argue that people who are faced with losing their homes should not be forced to pay a penalty to access their own money. At the same time, many financial experts are skeptical. One big concern is that people would be pulling money out of 401(k) accounts that are protected from creditors and putting it into a home that could ultimately be taken from them.
Another justification that Isakson gave is that people could use the withdrawals to get their underwater mortgages back above water, thereby allowing them to refinance their mortgage to a more favorable rate. Of course, with the recently announced changes to the HARP program, those with underwater mortgages will now have an easier time refinancing, so it might not be necessary to raid their 401(k) to make this happen.
One concern I have is that, if passed into law, the new rules would effectively allow anyone with a mortgage to raid their retirement account, whether or not they really need the money to cover their payments. While I understand the desire to help people stay in their homes, the last thing we need to do is make it too easy for anyone and everyone to pull money out of retirement accounts.
What do you think? Is this a good policy move? Or are we just kicking the can down the road, essentially transforming the problem from unaffordable mortgages into unaffordable retirements?
As an aside, I know of at least one reader out there will likely be strongly in favor of this idea… Our good friend Carlos, who cashed out his 401(k), paid the 10% penalty (plus taxes), and used the proceeds to pay off his mortgage just three years after buying his house.
Source: AJC.com
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Modified on November 7th, 2011 - 14 Comments
Filed under: Mortgages, Retirement, Taxes
About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!
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October 28th, 2011 at 8:32 am
It sounds like with the 120 day spending period, they’re attempting to allow people to stay current with a mortgage payment they can’t make with the income they have coming in. Short term it can help, but it isn’t sustainable and would definitely be kicking the can down the road.
October 28th, 2011 at 3:04 pm
Would the money you pull out be taxed? If not, I would definitely do this and increase my 401k contribution to make up the difference!
October 28th, 2011 at 4:58 pm
If I were Carlos, I would be pissed if this law passes since he paid the 10 percent penalty to withdraw from his 401k to pay his mortgage off. But, I think its a good idea because desperate people are doing it anyways and paying the penalty. Why not give them a break since its THEIR money, not the government’s.
October 28th, 2011 at 5:51 pm
You’d still have to pay regular income taxes on the money. And this would be at your top marginal tax bracket.
I don’t know I feel good and bad about this idea. On one hand there are people already raiding their 401k’s to pay their mortgage and getting hit with a 10% penalty, which kinda sucks. But I don’t think we should enable that behavior and this law might end up encouraging it.
October 28th, 2011 at 10:47 pm
You would be jeopardizing future if you use 401K fund now so I think it may not be a good idea here. But then again, there may not be any future for those who really need the money now. I think it would be good to have this option but I’m afraid that people may start abusing it…
October 28th, 2011 at 10:57 pm
Its about time. Stupid to penalize people for accessing their own money.
October 29th, 2011 at 12:42 pm
I sounds like a great idea to me! (as long as there are not any unintended consequences?! like too much money being taken out of the stock market?) I’m becoming convinced that in this era, getting out of every debt is a very good idea.
We pulled $40,000 out of an IRA a few years ago, paid the $4000 penalty and a bunch of taxes and paid off $33,000 to pay off the house. We did kind of underestimate the taxes and ended up taking on some credit card debt for the first time in our adult lives…but that is getting paid off and in a few months we should be done with everything and back to a 0 balance with the house paid off. We aiming for 0 debt and building savings to prepare for possible rougher economic times ahead. We’re trying anyway!
With a $14 trillion debt and rising on the U.S. Government … does it really make sense that pulling money out later from a 401K isn’t going to be taxed even more in the future?! A bird in the hand is worth 2 in the bush?!
I know there are good reasons on all sides but with some elected officials acting so irresponsibly with the $3.x trillion that they are spending every year … I wanted to have a home that was securely paid off. A piece in the Balt Sun a few years ago, mentioned a homeowner during the depression who lost his $3700 home because he didn’t have the $300 to pay it off. That kind of motivated me to pay the taxes but own our home.
October 30th, 2011 at 10:53 am
I see this as a potential Rob Peter to Pay Paul scenario that just creates problems for the individual down the road. How does the borrower know that he/she will have employment in the future to add to the lost 401K funds? Americans sometimes make foolish decisions to alleviate present pains without seeing how their decisions will affect their futures. I suggest that each person considering this option sit down with a financial Mortgage advisor. Every decision has a financial ramification. It could be a good idea for one and a not so good idea for another.
October 31st, 2011 at 3:33 pm
I think you said it best when you said is this just another example of kicking the can down the road. What happens when the 54 year takes out a couple hundred grand to pay off the mortgage and doesn’t have money to retire?
November 7th, 2011 at 12:14 am
First time on this site. Was researching this proposed law and came across this story. I think it is a good idea as long as there are restrictions such as only being able to take advantage of this program once or something along those lines. To reply to Evan’s comment though I have to say if a 54-year old has such a large mortgage that late in life he probably is not retiring early anyway. The reason I have seen from personal experience(limited so could be wrong) is that people used to have a small or no mortgage later in life instead now they have the opposite. A house paid for is probably the best thing for someone getting close to retirement. As for someone like me in their thirties struggling to get by this could be the thing to help get through the rough times. Just my opinion everyone’s situation is different.
November 8th, 2011 at 10:25 am
I actually think this might be a good idea. It’s better than making loans out of the 401k which you can do now but incur a penalty.
November 12th, 2011 at 10:23 am
To say that this proposed legislation is either good or bad is to completely ignore any one person’s situation. For some, this is a terrible option. They are very likely to only put off their misery for a few years. For others, it is a great option. I would take advantage of this for sure. As Donna noted, you can pay off a loan or severely lessen the total amount of interest paid (in many cases by 10s of 1,000s) in one swoop, THEN pay back into the 401 at an accelerated rate. The market has been a gamble for over a decade, and unless you are very good and or lucky, it has been hard to get real returns. Paying down a mortgage is easy to figure in terms of how much money it saves you.
March 29th, 2012 at 12:51 am
I like the legislation but would go further. For hardship cases that could result in foreclosure, I would allow direct monthly transfers from the 401K to the lender, NO TAXES, NO PENALTIES. The bank is happy because it has the money, and the homeowner has more time to get back onto his/her feet. When the homeowner recovers their income to the point where he/she can make the payments, the transfers stop.
IMO the home is more important than the 401K becuase it is a tangible asset. You can also protect the home with a living will or trust.
August 27th, 2012 at 4:51 pm
If you asked me ten years ago about taking money of a 401K to pay for a house, I would have thought you were crazy. Today, I did just that. My wife and I got hit hard and lost our house (housing value dropped 70% in a bankrupt city) and my spouse was laid off and without a job for six months. We have recovered but have no credit..which is fine with us. We are exempt from the 10% penalty, but taxes are really not the issue…stability is. Taxes are currently at an all time low for high earners. Furthermore, I was able to put all retirement into cash just before the stock market crash and got back in at the bottom. We now have no bills, no mortgage, and given the high demand for our professions another 10-15 years before we retire. I have given up on Wall Street and large banks. The best decision I ever made.