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Merlo
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Category: Tax
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Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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I want to use mt 401K to pay off my mortgage. The mortgage

Resolved Question:

I want to use mt 401K to pay off my mortgage. The mortgage balance is 75K.

I am currently underemployed and am finding making the mortgage payments every month leaves me with very little left over. I am one emergency away from foreclosure in my mind.

Would this be considered a hardship? Was are the tax implications at the end of the year.
Submitted: 4 years ago.
Category: Tax
Expert:  Merlo replied 4 years ago.

Hello JA Customer,

 

Hardship withdrawals from a 401k plan are only allowed for the following reasons:

 

  • You become totally and permanently disabled
  • Your medical debts exceed 7.5 percent of your adjusted gross income
  • A court of law has ordered you to give the funds to your divorced spouse, a child, or a dependent
  • You are permanently laid off, terminated, quit, or retire early in the same year you turn 55 or later
  • You are permanently laid off, terminated, quit, or retired and have established a payment schedule of regular withdrawals in equal amounts of the rest of your expected natural life. Once the first withdrawal has been made, the investor is required to continue taking them for five years or until he/she reaches the age of 59 1/2, whichever is longer.
  •  

    Taking money out of your 401k to pay down or pay off a mortgage balance would not be considered a hardship withdrawal.

     

    Even if you qualify for a hardship withdrawal for one of the reasons listed, you still pay taxes on the money withdrawn. The only thing you are not charged is the extra 10% early withdrawal penalty if you are under the age of 59-1/2.

     

    Whatever amount you take from the 401k plan would be added to your ordinary income for the year, and it is your total income from all sources plus your filing status that determines the tax bracket you are in and the percentage of tax you would pay. Obviously the more you take out in any one year, the higher your tax bracket would be.

     

    If this was helpful please press the Accept button. It is the only way we receive any credit for helping with these questions.

     

    Thank you JA Customer

     

     

    Merlo, Accountant
    Category: Tax
    Satisfied Customers: 9783
    Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
    Merlo and 4 other Tax Specialists are ready to help you

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