馃攳
Should I Use My 401(K) to Payoff Mortgage? When to Use 401(K) to Payoff Mortgage if Retired - YouTube
Channel: Money and Life TV
[0]
so recently a subscriber emailed me and
asked me a question regarding their
[4]
parents 401k that question was as
follows hi Mike
[8]
my mom has been retired from the
workforce now for several years and is
[12]
wondering if it would be wise to use her
401k to pay off the existing mortgage on
[19]
her home well the answer is it depends
but by the end of this video I believe
[23]
you'll have the tools and information
necessary to help you make that decision
[27]
for yourself if you're wondering the
same thing in this video we're going to
[31]
discuss two main things the first thing
we're gonna discuss is the pros and cons
[34]
as well as the factors that should be
taken into consideration before you
[38]
start withdrawing any money at all from
your 401k to pay off your home secondly
[42]
if you decide you want to go through
with paying off your mortgage early with
[46]
your 401k we will discuss a strategic
way to go about that process so you can
[51]
pay the least amount of tax possible
during that transaction let's begin! For
[56]
many of us the largest and last debt we
have to pay off is our home mortgage at
[60]
this point in your life maybe you are
thinking about having peace of mind that
[64]
the house is finally paid off or you
want to experience what it feels like to
[68]
be completely debt-free because you have
never been debt-free before I totally
[72]
understand your desire to feel that way
because it can bring about good emotions
[76]
but first what we need to do is
completely remove our feelings and
[81]
emotions completely out of this equation
so that we make sure we're making a
[86]
sound financial decision with our 401k
money now let's talk about the pros and
[91]
cons of using your 401k to pay off your
mortgage I have three pros and three
[95]
cons starting with the pros the first
pro of you use your 401k to pay off your
[99]
mortgage is it you will have peace of
mind knowing you own your home outright
[103]
secondly you will be saving money on
mortgage interest and third you will
[108]
need less money to live on going forward
because you will no longer have a
[112]
mortgage payment wrapped around your
neck now let's talk about the cons the
[116]
first con is you give up the potential
compounding interest impact of your 401k
[121]
investments and possibly trading your
investments for a lower rate of return
[125]
based on the home mortgage interest rate
secondly assuming you do not have other
[130]
sources of income outside of your 401k
you run the risk of becoming house rich
[136]
but cash-poor which could potentially
put you in a position later on where you
[142]
have to take on debt because you have no
other available funds you don't want to
[146]
have to take a mortgage equity loan
later on just to pay your normal
[149]
expenses because that's gonna put your
house at risk
[152]
the third con is without careful
planning you might pay more taxes than
[156]
you need to on your 401k distributions
in order to pay off your mortgage so
[161]
basically if you don't do this carefully
you can end up having a huge tax bill
[165]
and you draw down your 401k faster than
you ever wanted to to begin with so guys
[170]
those were some pros and cons obviously
there's more pros and cons out there but
[174]
now let's talk about some specific
factors to consider when going about
[178]
this decision making process I have
seven factors for you to consider and
[182]
also let's begin the first factor to
take into consideration is one what is
[186]
your annual mortgage rate two what is
the average annual rate of return on
[190]
your 401k over the past five to ten
years is it higher or less than your
[196]
mortgage rate I find in the real world
when I ask people that question most
[199]
people have absolutely no idea it's very
sad of what their actual average return
[204]
is within their 401k so if you don't
know ask somebody to help you or contact
[209]
the brokerage firm where your 401k
assets are held and ask them to help you
[214]
determine what your average rate of
return is in your account over the past
[218]
year five years ten years etc the third
factor is what is your marginal tax rate
[224]
since you have retired this is important
when determining how much tax you will
[228]
have to pay when you withdraw from your
401k you can get a rough idea of your
[232]
income tax rate based on the 2018 tax
tables I'll provide a link in the
[237]
description section of this video where
you can go to find those tax tables I'll
[241]
also link up a video I did to give you a
step-by-step guide of how to determine
[246]
your marginal tax rate for the fourth
factor is how much would you actually
[250]
need to withdraw from your 401k to pay
off your home with net of taxes many
[255]
people don't understand that if you owe
a hundred grand on your mortgage left
[259]
let's say you might have to take out
like 120 to 140 thousand dollars from
[264]
your 401k because of the taxes used to
to pay on that money the fifth factor is
[268]
do you have emergency fund of three to
six months worth of expensives saved up
[272]
for emergencies that can arise the sixth
factor is do you have other sources of
[277]
income to get by besides Social Security
how will you get by it for if emergency
[282]
comes up and the seventh and last factor
that I have for you guys to consider is
[285]
are you okay with taking risk in the
markets by keeping your money invested
[290]
so guys there's obviously more factors
than that but those are seven when I
[294]
really thought through this of that at
least from my perspective of what I
[298]
would want to think through before
making any decisions at all with my 401
[302]
K go through those take the time do your
homework and get the answers to your to
[307]
those questions for yourself work
through it to help you make a better
[310]
decision let's say chipper has ten years
left on his mortgage under his current
[319]
payment plan he owes $100,000 left on
his mortgage and his mortgage rate is
[325]
four percent if he continues to pay the
payments for this for the next ten years
[330]
by the time he pays off his mortgage he
will have incurred an additional twenty
[335]
one thousand five hundred dollars in
interest now we look over chippers 401 K
[339]
and upon further analysis we realized he
has been able to grow his investments
[344]
within his 401 K every year on average
at the rate of 7% net of investment fees
[351]
assuming chipper has 100,000 invested in
his 401 K if we let that money compound
[357]
for ten years at an average annual rate
of 7% his $100,000 would grow to two
[364]
hundred thousand nine hundred and sixty
six dollars over that ten-year span now
[368]
wait you say Mike that money hasn't been
taxed yet true good points if we assume
[373]
chippers net effective tax rate is 30
percent chipper would still come out
[377]
ahead by keeping this money invested in
his 401 K because he would still come
[381]
out with 70 thousand six hundred twenty
six dollars after-tax in this scenario
[385]
now compare the 70 thousand six hundred
twenty six dollars against the
[389]
twenty-one thousand and five hundred
dollars in interest he would have saved
[392]
by paying off the mortgage early by not
paying off his mortgage early chipper
[397]
actually came out ahead in total by 49
thousand dollars so chipper was by
[402]
investing in his 401k and not using that
money to pay off his mortgage early he
[406]
actually in this scenario came out forty
nine thousand dollars richer now of
[411]
course you and I both know the returns
in its 401k are not guaranteed the
[415]
market could go up or it could go down
we're not going to ignore that elephant
[418]
in the room remember one of the risks of
and keeping your money invested in your
[424]
401k is that you're the market could be
volatile
[426]
just like in the past ten years we've
had a little longest-running bull market
[430]
history so we suspect some volatility
going forward but nobody knows exactly
[434]
when but just keep that in mind if you
do decide to keep your money invest in
[438]
your 401k you have to be able to accept
that risk that you're taking on at the
[443]
end of the day once you have considered
the pros and cons as well as the factors
[447]
we have discussed in this video it still
comes down to your personal decision on
[451]
the matter I'm not gonna knock you if
you want to use your 401k to pay off
[454]
your mortgage
that's totally up to you and Who am I to
[457]
tell you otherwise it's your life it's
your money but just be thinking about
[461]
these things okay that's the point of
this video take these things into
[464]
consideration if you decide in the end
that you ultimately want to use your
[468]
401k assets to pay off your mortgage or
pay down your mortgage faster let me
[472]
give you a few tips so you can go about
that process and pay the least amount of
[476]
tax possible the first thing you want to
do in this process is determine your
[480]
outstanding mortgage balance next
remember that your 401k distributions
[485]
are taxed at ordinary income tax rates
ordinary income tax rates are based on
[491]
your marginal tax rate which follows the
tax brackets I mentioned earlier in this
[495]
video what you want to avoid is paying
more tax on your 401k distributions than
[501]
you need to sadly what I've seen in the
real world is that many people don't
[504]
even understand the concept that they're
gonna be taxed on these this money that
[508]
they take out of their 401k and what I
see happen as a major mistake all the
[512]
time is that someone will go and take a
huge distribution of their 401k during
[518]
that year and that raises their overall
income to a much higher amount all this
[523]
additional extra income coming out of
their 401k pushes them into a higher tax
[528]
bracket so during this process to
minimize your tax burden you want to do
[532]
some basic tax
before you start taking large amounts of
[536]
money out of your 401k you can do it
yourself or you can work with a CPA or
[541]
enrolled agent to help you do this
but basically you want to project in
[544]
total what you're gonna make for the
year from all your sources of income
[549]
before you take any additional money
from your 401k because that's gonna help
[555]
you determine where your tax brackets
are gonna where you're gonna fall within
[559]
the tax brackets once you determine how
much total income you expect to make for
[563]
the year then you want to determine how
far away you are in terms of income from
[568]
hitting that Nicks higher tax bracket
now what I would suggest or at least for
[572]
you to consider is to you because you
want to stay below that next tax bracket
[577]
so that you're taking this money out of
your 401k as cheaply as possible as tax
[584]
efficiently as you can let's say that
you project your income for the year and
[588]
you determine your $20,000 in income
away from the next higher tax bracket so
[595]
you look at your projected income you
look at the tax brackets and of this
[598]
twenty thousand maybe instead of taking
twenty thousand out and bumping up right
[602]
against that bracket maybe you take
fifteen thousand out or sixteen thousand
[606]
out of a 401k at that point when you
take out that sixteen thousand you then
[611]
set aside money for income taxes for
federal and state especially if you live
[616]
in a state that has income taxes as well
put that money aside for taxes let's say
[620]
your taxes on that is like four grand
okay so you've got you pulled out
[624]
sixteen thousand you set aside four
thousand for taxes because you know
[628]
you're gonna have to pay them the extra
twelve thousand that remains that's the
[632]
amount of extra money you drop on your
mortgage and apply it completely to
[637]
principle and then as the next year
rolls around you do the same thing you
[640]
project your income figure out how far
away you are from hitting the next tax
[644]
brackets and pull out a little bit more
and keep paying on that principle but
[648]
make sure you setting money aside for
that taxes as well and you keep doing
[653]
that until your mortgage is completely
paid off
[656]
yeah sure you're paying a little bit of
extra interest but at least you're not
[660]
being hit with a huge tax bill or you're
minimizing your taxes as much as
[664]
possible by spreading out your
distributions from your 401k
[667]
paying off your mortgage a little more
slowly you might be able to save
[671]
hundreds or even thousands of dollars of
additional income taxes that you would
[676]
have otherwise paid had you taking all
that money out at once
[680]
from experience do you guys think most
people do it this way you guys think
[683]
they'd spread out their distributions
and have a strategic approach no no no
[689]
no I can tell you from experience that
most people don't do that in fact they
[694]
they usually just take out a huge sum of
money they don't tell their accountant
[697]
they never talk to their to their
accountant at all before they even go
[700]
and do it
and then they're surprised when it comes
[704]
to tax time and we have to we see this
huge distribution all of a sudden as
[708]
their accountant and we're like well why
didn't you tell me about this I could
[711]
have saved you a ton of taxes and so
what ends up happening is the person has
[715]
to pay maybe ten twenty thousand dollars
in taxes and they're completely shocked
[719]
by how much tax they actually have to
pay and it is it'll make you sick to
[724]
your stomach if you do that to yourself
planning is the key to this thing being
[728]
as successful as possible for you as we
wrap up this video I'm gonna leave you
[731]
guys with this for some people paying
off their mortgage using their 401k
[735]
makes perfect financial sense it makes
financial sense for them based on their
[739]
personal goals and their personal
situation now for me personally do I
[744]
ever see myself using my 401k to pay off
my mortgage as of right now I don't see
[749]
myself doing that in the future
what do you guys think is do you think
[752]
paying off your mortgage using your 401k
is a good idea is it a bad idea why are
[757]
why not let me know in that comment
section down below alright guys well
[760]
that is all the information I have for
you today yeah if you guys liked the
[764]
video make sure you drop a like before
you leave be sure to share this
[767]
information with a friend especially if
you know somebody who's retired and
[770]
who's thinking about paying out their
mortgage because maybe their mortgage is
[774]
the last that they have and they're
looking over to their 401k to do it last
[778]
but not least if you're new to money in
life TV well welcome to the channel
[781]
folks this channel is all about helping
you become physically fit as we teach
[786]
finances investing and taxes this stuff
on a regular basis so be sure to
[792]
subscribe to the channel if you have not
already for our newest weekly uploads
[796]
well thank you so much chipper and I had
a blast hanging out with you once again
[800]
as always here on money and live TV have
a great week everybody now remember the
[806]
information you learned in this video
take it and use it to live your life on
[810]
gauged I'll see you guys in the next
video take care everybody peace
Most Recent Videos:
You can go back to the homepage right here: Homepage