Cashing out 401k for Home Dormer Loan

[r0ck632]

Hello trying to get some advice on whether or not to cash out my wife's 401k to help put money down on an approximate 150k dollar 203k home refinance loan at 4.5 percent to pay for a dormer. Quick background, We are both 35 years old, my wife is a stay at home mom and hasn't worked in the past 6 years. My gross salary is approximately 140k a year. My wife currently has a little more than 22k in her 401k. After the 20 percent fee we will get 18k prior to what we will owe at tax time. We have about another 10k to also put down. So we can cut the loan amount down to around 120k. My question is it worth paying the fees to make a larger down payment on the loan over the 30 year period? I feel like in the long run it would be worth it But would like to hear your thoughts. Thanks

 

[cbg]

Personally, I don't think it's ever worth paying the fees and cashing out a 401(k) unless it's the only way to keep a roof over your head.

 

[FlyingRon]

I agree. With CBG. Cashing out a 401k is stupid unless you can't continue living unless you have the money. I don't know where you get 20% from. You will owe a 10% early withdrawal penalty PLUS whatever the taxes are which are about 25% federally for you plus whatever you owe your state.

 

[LdiJ]

I agree. With CBG. Cashing out a 401k is stupid unless you can't continue living unless you have the money. I don't know where you get 20% from. You will owe a 10% early withdrawal penalty PLUS whatever the taxes are which are about 25% federally for you plus whatever you owe your state.

Ditto...if you have a 20% fee on top of taxes and penalty of at least 35% its absolutely NOT worth it. The taxes alone make it not worth it.

 

[r0ck632]

Ditto...if you have a 20% fee on top of taxes and penalty of at least 35% its absolutely NOT worth it. The taxes alone make it not worth it.

We were told by our 401k company that we would have to pay a 20 percent withdrawal penalty from them and then a 10 percent penalty at tax time. Are there more fees they are not telling us about? So we would essentially be paying 6k in fees. Wouldn't paying an additional 20k down payment at 4.5 percent interest save way more in the length of the loan than 6k in fees now?

 

[ShyCat]

Wouldn't paying an additional 20k down payment at 4.5 percent interest save way more in the length of the loan than 6k in fees now?

Well, that's a math question, not a legal one.

 

[tranquility]

We were told by our 401k company that we would have to pay a 20 percent withdrawal penalty from them and then a 10 percent penalty at tax time. Are there more fees they are not telling us about? So we would essentially be paying 6k in fees. Wouldn't paying an additional 20k down payment at 4.5 percent interest save way more in the length of the loan than 6k in fees now?

Add in any state penalty for the state you're in and don't forget you have to pay taxes on the money in addition to the penalties.

 

[FlyingRon]

We were told by our 401k company that we would have to pay a 20 percent withdrawal penalty from them and then a 10 percent penalty at tax time. Are there more fees they are not telling us about? So we would essentially be paying 6k in fees. Wouldn't paying an additional 20k down payment at 4.5 percent interest save way more in the length of the loan than 6k in fees now?

You misunderstood them. They are required (unless you have some exception that would apply) to withhold the 10% penalty and 10% for taxes that might be due. In fact, given your income level as stated, you will owe 25% income tax on the withdrawn funds in addition to the 10% penalty. If you're in a state with state income tax, you owe that too. They just take 20% directly out of the withdrawal, but you better lay aside the rest for your tax bill at the end of the year.

I don't think a 30 year loan is a great idea for home improvements is a great idea but $20K at 4.5% for 20 years is $16,000 interest. Of course your taxation on the 401k will be paid UP FRONT where as the interest on the loan will be spread out over the 30 years (though you do pay more early on). The other thing to consider is that the interest on the loan is likely tax deductible, but your tax and penalty is not.

 

[davew128]

We were told by our 401k company that we would have to pay a 20 percent withdrawal penalty from them and then a 10 percent penalty at tax time. Are there more fees they are not telling us about? So we would essentially be paying 6k in fees. Wouldn't paying an additional 20k down payment at 4.5 percent interest save way more in the length of the loan than 6k in fees now?

The 401k company is not a tax professional. The tax is whatever your tax rate is plus 10% early distribution penalty (more if you're in California). Period.