I’m 60 years old and want to pay off my mortgage, open an IRA, and pay off some bills. Also, he wants to withdraw $250,000 from his 401(k) to do this. Is this a wise thing to do?
Dear readers
So many people write to me (and I’ve responded to quite a few) asking if they should pay off their mortgage with money from their retirement accounts. But I wanted to answer your question because I think a lot of people, especially when it comes to planning for retirement, fall into the trap of looking at something from too big a lens of the “big picture.” Because I think it’s a good idea to put it away.
Don’t get me wrong. It’s important to think big when planning for retirement, but you can’t know if moving is the “smart move” without considering all the details. For example, $250,000 is a lot of money to withdraw from her 401(k), but if his portfolio is $2.5 million, he probably won’t feel that way. This kind of withdrawal will probably result in a pretty hefty tax bill, which probably isn’t too surprising if you’re already in the highest tax bracket.
These are just examples, but they give you an idea of how to frame your questions considering your own personal situation.
Please consider all financial implications of such a distribution before making your decision. Think about how much money you have set aside for retirement and whether such withdrawals could put you at risk in the future.
Assuming you’re still working (you can only contribute to an IRA with the dollars you earn), is there a way to pay off your debt without taking so many withdrawals from your 401(k)? Do you have a plan for how to incorporate that money into your portfolio before you retire? And have you considered the possibility that you won’t be able to make it up before you retire for good?
Not everyone wants to have a mortgage hanging over their head when they retire, and there’s good reason for that. Retirement income is often limited to pensions, Social Security, and personal savings and investments. Perhaps it would be nice to not have to get that bill every month and be able to use that cash elsewhere.
But if you can afford to pay it back, there are no difficult conditions (such as higher interest rates in a few years), and you have a plan to pay it off on time, is it something you need to do now? Especially if it means taking away your old self’s future?
Remember: When you withdraw from your 401(k), you not only pay taxes on the distributions, but you also reduce your potential investment income because your balance is significantly reduced.
You are clearly thinking about the future. I think that’s why you want to open an IRA. So why not change the way you think about how you spend your money? Before you start your 401(k), write down your cash flow (that is, your sources of income and the fixed expenses you pay) and some of your expected short-term and long-term expenses. Think about medical care, taxes, groceries, other necessities, and of course, unexpected emergencies. What do you think about that withdrawal now?
There may be a way to pay off your debt faster without taking such a huge chunk out of your nest egg. If you can do that, your future self will thank you.
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