My company match 401k is in a target date, I guess I could just do that for the Roth too.
Financial Thread
- Thread starter NATEizKING
- Start date
Random scenario. Two 40 years old and between spouse 1 401k and spouse 2 401k could take a withdrawal of only the money that their employers have matched and pay off a house today. The payoff is $148,000. Interest rate is 4%. Would you do it?
Things to keep in mind:
Markets at all time high
This is only Employer matching money
Current tax bracket is 25%
Things to keep in mind:
Markets at all time high
This is only Employer matching money
Current tax bracket is 25%
Absolutely not.
401k is for retirement not a place to save for a home. Whether it's employer matching money makes 0% difference.
You have no idea of what the return of the stock market will be just like you have no idea of what your home value will be in 25 years.
In addition, you only have a certain time frame to pay it back and there will be a dollar limit.
http://www.bankrate.com/calculators/retirement/borrow-from-401k-calculator.aspx
I feel like the "employer matched" note is some sort of gambler's "playing with house money" fallacy: it's irrelevant where the money came from
Taking a 10% hit (+income taxes) on savings to pay down tax deductible interest payments doesn't seem like it would make sense in many scenarios
yeah I don't know any 30's doing this, my siblings are still 20's. Hell, I felt cheapy still having them pay for my part of the phone bill (family plan) just out of college until DH and I got on the same one. Guarantee my siblings are all still doing that and all but one are now older than I was. Plus getting money for other stuff. But I wouldn't want to trade financial situations with them for anything. Do wonder what will happen as my parents age with limited retirement funds and only one kid is in any shape to help. Ugh. Not thinking about that today!
Personally I wouldn't and I will explain my reasoning. I also recommend that you run these numbers yourself instead of just trusting me.
So for a $149000 home on a 15 year loan at 4% rate your monthly payment would roughly be $1,100. Now if you move the value of this series of payments to 15 years in the future (hint the FV function in excel will do this for you) your loan cost is $269,500.
If you were to take money out of your 401K you would need to withdraw ~$175,000 (assuming 25% tax). If instead you left that money in the 401k to grow, it would grow into $315,500 in 15 years. This is assuming you get an annual return of 1/25 (inverse of the current shiler PE ratio).
So to me it makes sense to leave that money in the 401k.
I would guess not seeing them as adults, thinking they need the help, siblings being cajoling - any combo of that. Not really something I can answer. Maybe it's gotten better in the last couple years now one got married and another (finally) moved out.
dumb question but why don't they treat each child equally? if they offered them $1k for something shouldn't they offer you the same?
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well, I'm not asking them for money so there's no reason for it to be offered to me. I assume Xmas money to all of us is the same. I believe the money they offered for sibling's wedding is the same as they gave for mine. As for the other stuff.......well, the squeaky wheel gets the oil.
We can take it to PM if you have other questions - getting pretty far OT here.
A $175,000 would only leave $131,250 after a 25% tax hit so they would need to withdraw more - making it an even worse decision. Isn't there also a 10% penalty? I think they would need to pull out about $220,000 to pay off the house.
If their interest rate on the mortgage is higher than the return they get on their 401k... maybe. This seems unlikely so no.
So mathematically you want to pay 30% tax to the government in order to payoff a loan at ~4% interest. Nope.
Yes, the market is hitting new highs everyday and getting overextended. Perhaps sell a little bit and sit on the cash for awhile.
Really there is more to it than that though. By doing the withdraw and paying of the house, all of the sudden this person has freed up the amount of money being spent on house payments every month. That money could be used invest in a myriad of other things - some of which could return significantly better returns than the 401k.
What is the money that gets freed up going to be used for also needs to be included in any thought process on if its a good move or not.
that's the only scenario I can see where it's marginally ok. But I doubt they'd have something in the 7-10% range. Maybe where you are paying out the nose on PMI and want to pay to the point to remove that but in that case it's hard to see that you'd have a lot stocked away in a retirement plan anyway.
Another thing that could make a difference is job outlook and stability, along with emergency funds availability. If the person's job is unstable and likely to be lost in the next recession one could also weigh that in the decision. Becomes a non factor if they have a mulit year emergency fund socked away.
