Considering Using 401(k) to Pay Off Home?

Q. I sold my farm 2 yrs ago & put the money into my home using this as my homestead.

I purchased this home 4 years ago but had not paid for it completely. I am now selling it and the home I want to buy costs more. To pay for it I have to close out my 401(k) account which will save me paying interest for years on the home. Your article on taxes however sounds like it may cost me 35% tax which would not leave me enough to buy my home. How does the 10% tax figure in? Thank you for helping to clear my mind. DL


A. How much you will have to pay in taxes when you take money out of your 401(k) depends on your age and your income. Any money that you take out, regardless of your age, will be taxed as Ordinary Income. That means it will be taxed just like it was money you earned from a job. Depending on your income level this could be next to nothing all the way up to 35%.

If you are under 59 1/2, then there is an additional 10% penalty that the IRS imposes. The only way around that penalty is to take a series of systematic equal periodic payments for at least 5 years or until you reach 59 1/2--whichever is longer.

As a result, it may not be in your best interest to pull this money out of your 401(k) to pay off your home. If you are over 59 1/2 and in a low tax bracket then you should be fine. If you are under 59 1/2 then you may want to wait.

Thanks for the question!

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