Question by Deborah V: Can you use your 401 k to pay down your mortgage if you refinance without receiving a penalty?
Can you borrow your 401 k money to pay down your mortgage if you are planning to refinance your mortgage without being penalized? I know you can borrow from your 401 k if you are a first time buyer but I don’t know about refinancing. Any advice would be greatly appreciated.
Best answer:
Answer by Mom
No since you are NOT considered a First Time Home buyer
Give your answer to this question below!
Borrow perhaps–depends on your employer & the agreement
Withdraw and not repay, no–penalty
Nope.
Depending on the rules for your specific 401k plan, you might be able to make a withdrawal without penalty if you’re facing foreclosure, or you genuinely don’t have enough income to live on.
But, the withdrawal would still be taxable, because it’s money that hasn’t been taxed before. So if you’re already paying the tax, it might be worth it to you to go ahead and pay the 10% penalty too.
You have to check your specific 401k plan to see what specific reasons they allow you to borrow from it. You cannot take a distribution from a 401k (other than excessive contributions) while still employed there, unless you are what your plan considers retirement age (65 for our plan).
Note that the principal and interest to pay back a 401k loan is not deductible for any reason, so the loan is paid back with after tax money, which may be taxed again when distributed (depending upon your tax rate then). So your loan and interest amount could end up being double taxed. If no longer employed there, any balance of the loan not fully paid back promptly is considered a distribution, subject to tax (and 10% penalty under age 59.5).