For the first time in my life, I'm not really sure what to do with my money. A little over a year ago I changed jobs and doubled my income, my only debt is my home loan, which has a balance of ~40k left.
I bought the house at 22 and am 42 now. I have a 401k from my previous job with ~65k in it. I am not married and have no children (very much on purpose), and my sole goal for the last 20 years has been paying off my house. I have paid additional principal along the way, but there are about 25k worth of cosmetic improvements that I want to make at some point, I elected to pay the loan down faster and get these non-essential repairs done all at once.
At this point I could dump my old 401k, pay off the house and make my upgrades all at once with what I would keep after penalties, and without totally nuking my savings. I know that generally this would not be the right move, but being debt free with deferred maintenance complete would free up more money that I could contribute to my new retirement fund and rebuild the portion of the savings I would spend.
Other less relevant info that may be helpful:
My job is a mix of office planning and work in the field; AI has changed the way that the office work gets done but could not replace the work done on the ground, at least not until robots are walking around and are able to improvise on complicated plans when issues arise.
I recently bought a new (to me) truck and paid cash, so I won't need to replace a vehicle anytime soon.
I have ~130k in other long-term investments I have no intention of touching until I retire and am still making contributions to these.
I am currently maxing out my 6% retirement contribution; additional contributions would be unmatched.
I purchased the property for ~225k 20 years ago. It would list for ~500k today. Current mortgage payment is ~1k per month.
I always thought I would purchase an investment property after I paid my house off…I feel much less like doing this now that the end is in sight on my current mortgage, so I am open to other suggestions once this is settled no matter how I approach it.
I appreciate any feedback offered.
Dump old 401k to pay off home loan?
byu/31dirty inpersonalfinance
Posted by 31dirty
7 Comments
No… you should not drain your future to finance your present.
Someone making the plans you are making is likely vastly underappreciating the *tax advantaged* nature of *tax advantaged* accounts. And then there’s the additional *penalty* to add more pain.
> I have ~130k in other long-term investments I have no intention of touching until I retire and am still making contributions to these.
So another common mistake is that people think of their retirement money on a *per account* basis.
There is nothing about the old 401k that makes it different enough that you should not be thinking about it in the *exact same* way that you’re thinking of the ~130k that you say you “have no intention of touching until I retire.”
Perhaps the problem is that you’re just unaware that you can *roll over* the old 401k to an IRA and treat it like the other ~130k retirement money.
* https://www.reddit.com/r/personalfinance/wiki/retirementaccounts/rollovers
You’re going to pay a 10% penalty + income tax to withdraw your 401K, and there’s no good reason to do that. You’re lighting a substantial amount of money on fire for the “gain” of accelerating your goal a few years. You have the cash flow, use it to finish paying off your mortgage and completing the repairs. Roll the old 401K into an IRA or your current 401K if it allows it.
Do you have an IRA?
I would keep contributing to the 401k, and an IRA.
And use any other available income to pay for the loan and expenses. Why pull out of retirement when you can use new money??
You don’t want to ruin retirement for costs today. Not when you still have income that can go to these costs.
If anything, reduce contributions to pay it down first. Not pull out early then contribute more later.
Whats the rate on the mortgage? Cause if its low, then money you invest will be making more than that interest. If you pay it down, then you’re just sticking money into equity that isn’t going to earn as much as it already is doing. And pull out with taxes and penalties amplifies that down.
If the rate is low, theres no reason to pay it down sooner. Keep investing. In the long run you’ll win out more.
At age 40, the rule of thumb is to have 3x your salary in retirement savings. You should also be contributing more like 15%, not 6%, probably. My answer to your question is a hearty NO. You cannot afford it, and dipping into retirement assets is almost always foolish unless you’re having a true hardship. You will need to pay both a penalty and income tax on it.
This really depends on your preference, sometimes doing this is so so worth it. I had a buddy do something similar and they couldn’t be happier with zero debt and been that way for over 10 years and they are as happy as a clam.
Just remember that money you loose in penalties is gone, and you won’t get it back. It is your money and you can do with it as you please and what works for your peace of mind might be way better than traditional advice.
not a good idea. untouched, that $65k with zero contributions and a modest 5% growth, will grow to around $260K by the time you are 70.
No you should not do this due to penalties like other commenters mentioned. How much money do you make?
It sounds like you’re behind on retirement investing and you need to be investing more not just 6%. Pay off your house and save for the repairs out of your income or do one or the other. Do not cash out your 401K.