Thinking about taking money out of 401k to pay off the house. What percentage will we have pay for taxes? I've heard 10%, 25% and 49% depending on who you speak with. We are under 50.

Do NOT do it!

The tax approaches 50% for high-income earners, and will be AT LEAST 25%.

It is NOT worth it!

The tax you pay depends on your TOTAL Income. So its impossible for anyone to tell you without filling out a return for you. Its also possible that the extra income might push you into a higher bracket, thereby affecting your other income. There is also the 10% penalty to consider since this wouldn't qualify as a hardship unless you needed to stave off a foreclosure.

Another point is the loss of income. Lets say you have an 8% mortgage and are at a 25% tax bracket. That means the effective rate is 6%. Now lets say your 401K is earning 10%. You are now losing 4% of income.

This is really a bad idea all the way around.

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Originally Posted by caroln

Thinking about taking money out of 401k to pay off the house. What percentage will we have pay for taxes? I've heard 10%, 25% and 49% depending on who you speak with. We are under 50.

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A good rule of thumb is to have 20% withheld PLUS 10% for the penalty that the IRS will tack on for early withdraw. The reason why this is a tricky type of question is that the 20% is to cover the average tax bracket that you might be in. By withdrawing a large amount though, it may put you in a higher tax bracket. But you WILL be penalized the 10%regardless of your tax bracket. Hope this helped you understand the calculation a little better.

Good point, Mobea!