Dear Penny: My Husband’s on Furlough. Should We Use 401(k) to Pay Off Home?
We have $40,000 remaining on our mortgage. My husband was furloughed earlier this month. His 401(k) has over $100,000.
We learned that it’s possible to pull money from his 401(k) without penalty during this pandemic. Should we pull the remaining amount of our mortgage from his 401(k) to pay it off?
Our interest rate is high (5.375%) because we purchased the house as first-time homebuyers in 2009. Instead of refinancing, we have been paying more each month to try to pay it off sooner than 30 years.
My job is not in jeopardy, so between my salary and his unemployment pay, we will have money coming in to start putting money back into his 401(k), but we are not sure if this is too risky.
Virtually every news alert you get these days makes you feel like the apocalypse is nearer.
The one piece of good news: Interest rates are lower than they’ve ever been.
You probably feel like you’re paying more interest on your mortgage than anyone on the planet. And with your husband’s furlough, the market turbulence and the new rules for coronavirus-related retirement withdrawals, I get why it’s tempting to take money out of the market and use it to eliminate what’s probably your largest debt.
But I’d urge you not to do so unless it’s a true emergency — and it doesn’t sound like this is one.
One point of clarification: Your husband won’t be able to put money into his 401(k) while he’s furloughed. That’s because when you contribute to your 401(k), you’re technically deferring part of your salary, but you can’t defer a salary that you’re not earning.
That said, the $2.2 trillion CARES Act does make it less costly to take money out of your 401(k) early or borrow money from it.
In normal years, you’d pay a 10% penalty on an early withdrawal, plus income taxes on the money when you filed your return for the year.
But in the year of coronavirus, the 10% penalty is waived for withdrawals up to $100,000 related to coronavirus. So you wouldn’t pay a penalty if you needed that money because you or a family member became ill with the virus, or if you got laid off due to the economic fallout.
You also don’t have to pay income tax all at once; instead, you can spread out the tax bill over the next three years.
In normal years, I’d be squawking something like: “Don’t take money from your 401(k) early! You’re robbing your retired self!”
That still is a concern. By taking money out now, the long-term risk is that you sell low and miss out on the eventual recovery.
But in coronavirus year, I’m more worried about that money not being there in a worst-case scenario.
You say your job isn’t in jeopardy. But I’m not sure how many people can say with certainty right now that their job is truly safe, or that it will be if the economy is still sputtering three or four months from now.
We also don’t know how long your husband’s furlough will last or what unemployment benefits will look like if he’s out of work for a prolonged period.
Sure, facing the crisis ahead would be easier without a mortgage payment. But there’s a good chance you’d qualify for mortgage relief if you needed it.
For now, it’s worth talking to a lender about whether you could refinance at a lower rate. Since you’re still employed, this may be an option. Usually, for refinancing to make sense, you’d need to knock at least 1 or 2 percentage points off your current rate.
Of course, lenders may well look at your husband’s furlough and income loss and quickly eliminate this as an option. So if refinancing isn’t viable, I want you to only make the minimum mortgage payments, unless you have a sizable emergency fund — as in a year’s worth of living expenses, given your husband’s furlough and the volatility of the times — and no consumer debt or student loans. The excess payment will better protect you if it’s in a savings account you can access immediately or if it’s being used to tackle higher-interest debt.
Even if you’re debt-free with sufficient emergency savings, putting your extra money toward your mortgage may not be your best option.
Although your husband can’t contribute to his 401(k) right now, he could probably contribute to an IRA in 2020 based on the income he earned at the beginning of the year.
I understand why it’s frustrating to pay a higher mortgage rate at a time when you’re probably trying to slash expenses. But it sounds like you’ve done a good job of preparing and that you’re staying afloat.
Focus for now on the big picture. Your finances will be much stronger both now and in the future if you keep that money in your husband’s 401(k).
Robin Hartill is a senior editor at The Penny Hoarder, a certified financial planner and the voice behind Dear Penny. Send your tricky money questions to [email protected]