Drawbacks to Reducing your Mortgage with 401(k) Loans
By Kelly WingardNFNS Columnist
Borrowing money from
your retirement fund sounds like an easy way to finance a mortgage down
payment, but be aware of the consequences if you're tempted to use your 401(k)
funds to put a larger down payment on your new home loan or pay off your mortgage
early. Before you reach into your retirement piggybank, you need to evaluate
the loan costs, tax implications, and long-term effects on your retirement
goals.
Do the Math
In order to calculate the cost of borrowing from your
retirement fund, project the amount of interest your account could earn during
the payback period. Compare this figure to the amount of interest you will pay
yourself back to determine how much retirement savings may lose. Your financial
advisor should be able to help you with this. Be sure to include any fees
charged on the loan.
Evaluate the Tax
Consequences
Interest charged on mortgage loans, i.e. loans secured by
your home, may be deducted from your taxable income. However, the interest you
repay to your 401(k) account is not deductible because it is not considered mortgage
interest. High-income taxpayers may benefit from borrowing down payment amounts
from nonretirement sources.
Consider Your
Long-Term Goals
Home equity and retirement
savings are two important components to building your financial security. The larger your mortgage down payment, the
quicker you build home equity, but be careful you don't shortchange your
retirement savings in the process. If you borrow from your 401(k) for a new
home loan, you will need to pay back both the loan plus your mortgage. This
financial strain may cause you to forgo making 401(k) contributions, which
could jeopardize your future retirement goals.
About the Author
Kelly Wingard is a
freelance writer and a 25-year veteran tax preparer. She contributes regularly
to the University of Illinois Tax School training manual for tax professionals.
About the Author
Kelly Wingard is a freelance writer and a 25-year veteran tax preparer. She contributes regularly to the University of Illinois Tax School training manual for tax professionals.

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