Should I Get a Loan Or Withdraw From My 401K if I Can't Afford My Mortgage Payment?

I took a 401K withdrawal out when I was getting divorced to pay of my car and get my ex-wife off the title, which she in turn refinanced the house we owned and paid me the equity that was owed to me. But the next year at tax time, guess what? Not only was I $60,000 in debt, but owed $7,500 to the IRS. I needed that like a hole in the head.

So what do I say about 401k withdrawals? Don't do it if at all possible. "Should I take a withdrawal or get a 401K loan?" is one the most asked questions we get. It's understandable you are desperate to hang on to your house and will do anything to avoid having a foreclosure, but I don't think you should do it. You will pay income tax on that money eventually and will probably be hit with a 10 percent penalty for taking the money out before you are 59 1/2. After the money runs out you will probably find yourself right back in the hole. You won't have any more money to take from your 401K and you will most likely fall behind on your mortgage again

A 401K loan can be risky. If you are get laid off you will typically have to repay the loan within a short period of time. With the current economic situation still going strong, there is a chance you may face a layoff. So if you take that loan out and then get laid off and after that you don't have the money to pay back, you will run into a tax problem. The loan will be treated as a withdrawal and you'll have to pay tax and probably a 10% early withdrawal penalty. A loan can also cost you more money because the markets may rally, which they have been doing lately, and if you have a loan out at that time, you will have missed an opportunity to recoup the money you have lost during the down market.

One important fact. The money you have in your 401K and IRA is protected if you ever have to file bankruptcy. You can keep that money no matter what.

If there is anything you can do to NOT take money from 401K please choose that option.

For answers to all your financial questions check us out. Subscribe so you never miss the boat.