Question about using small 401K fund to help pay off mortgage

[Campy1]

I owe $150,000 on a $155,000 fixed, 30 yr mortgage at 4.5%.
I still have an old 401K fund worth $54,000 from a previous company that has been sitting in a money market fund for the past 5 years not making or losing much at all. I would like to pay off my mortgage ASAP and I was wondering if it would make sense to cash out the 401K and use it to pay down the mortgage. I understand that conventional wisdom would say this is an unwise move (penalty equals approx 12%) but it looks like I could save about $45K in mortgage interest over the life of the loan if I did this. I have other money in other 401K accounts that I would not consider touching. I have less faith in the market these days and my logic is that I would rather pay down the debt which is a sure thing rather than "bet" on the market and hope for growing the $54K. I would like to get some opinions from someone that has more financial wisdom than me......
Thanks

[disneysteve]

Conventional wisdom exists for a reason.

No. You do not cash out your your retirement account to pay off debt - particularly low interest tax deductible debt. The effective interest rate on your mortgage is probably more like 3.4%. When you cash out your 401k, you pay a 10% penalty plus income tax so the total penalty isn't 12%. It is more like 30% or higher. Cashing out 54K will cost you upwards of $16,000 in penalties and taxes.

Leave your 401k alone - or perhaps roll it into an IRA if you'd like. Just don't cash it out.

[Campy1]

Originally Posted by disneysteve

Conventional wisdom exists for a reason.

No. You do not cash out your your retirement account to pay off debt - particularly low interest tax deductible debt. The effective interest rate on your mortgage is probably more like 3.4%. When you cash out your 401k, you pay a 10% penalty plus income tax so the total penalty isn't 12%. It is more like 30% or higher. Cashing out 54K will cost you upwards of $16,000 in penalties and taxes.

Leave your 401k alone - or perhaps roll it into an IRA if you'd like. Just don't cash it out.

I knew it was a good idea to ask this forum about this topic. Thanks for letting me know accurate details of the affects of cashing in 401K money. I didn't know that the penalties would be so high. I will definately roll it into my current employer's 401K or leave it alone.

[riverwed070707]

Everything DS said, plus, why would you spend $54,000 to save $45k in interest?? You'd be losing money, not saving -- doesn't make much sense to me.

[disneysteve]

Originally Posted by riverwed070707

Everything DS said, plus, why would you spend $54,000 to save $45k in interest?? You'd be losing money, not saving -- doesn't make much sense to me.

He wouldn't lose money because the 54K would go toward his equity. It wouldn't be spent and gone. However, as I pointed out, the taxes and penalties would outweigh any possible benefit.

[bjl584]

Originally Posted by Campy1

I owe $150,000 on a $155,000 fixed, 30 yr mortgage at 4.5%.
I still have an old 401K fund worth $54,000 from a previous company that has been sitting in a money market fund for the past 5 years not making or losing much at all. I would like to pay off my mortgage ASAP and I was wondering if it would make sense to cash out the 401K and use it to pay down the mortgage. I understand that conventional wisdom would say this is an unwise move (penalty equals approx 12%) but it looks like I could save about $45K in mortgage interest over the life of the loan if I did this. I have other money in other 401K accounts that I would not consider touching. I have less faith in the market these days and my logic is that I would rather pay down the debt which is a sure thing rather than "bet" on the market and hope for growing the $54K. I would like to get some opinions from someone that has more financial wisdom than me......
Thanks

It's generally a bad idea to use your 401K for anything other than retirement. The penalties and taxes will take any benefit out of doing what you want to do. I'd suggest rolling the 401K into a self directed IRA and start investing in something other than money market funds. Dividend yielding stocks and funds, or a targeted retirement fund if you don't want to bother with it all that much.

[creditcardfree]

Originally Posted by bjl584

It's generally a bad idea to use your 401K for anything other than retirement. The penalties and taxes will take any benefit out of doing what you want to do. I'd suggest rolling the 401K into a self directed IRA and start investing in something other than money market funds. Dividend yielding stocks and funds, or a targeted retirement fund if you don't want to bother with it all that much.

I agree with this, too. You can roll your 401K into an IRA at any mutual fund company, brokerage firm or bank without any penalty. Since it isn't earning much it seems you might just simply look for a better investment that will earn more over time than it is now or has in the past.

[Frugal]

I personally would not cash that out, but then you might want to talk to a financial professional about it.

[kv968]

Originally Posted by Campy1

I will definately roll it into my current employer's 401K or leave it alone.

Your best bet would most likely be to roll it into a Traditional IRA with a mutual fund company instead of leaving it where it is or putting it into your current employer's 401k. Reason being, you'll have more choices of investments and the expense ratios on the funds may be lower. I know you said it's just sitting in a money market account now but you may want to (and probably should) invest in something else at some point and it would be nice to have more options than probably what's offered in your 401k's.