Should I Use My 401k To Pay Off My Mortgage?
I got an email from a reader yesterday that asked:
“Hello Hank, I’ve been with my company for almost 20 years and I have over $1,000,000 in my 401k. I am 45 years old and I have a house mortgage still of $295,000 for another 13 years paying about $2000 per month. Would it make sense to get out of my mortgage and have that extra $2000 per month to put towards better investments? I plan on working for 10-15 more years before retiring. What do you think? Is that a good idea?” - Neville from Mississippi
Welp, where to start. First of all Neville, GOOD JOB on putting away $1,000,000 in your 401k by 45! That’s tough to do and the first million is always the hardest! Which leads to point #1 (again, take it how you like, I’m not a professional, but this is what I’d do in this situation):
1. The first million is the hardest to get! It’s taken you 25 years to get there! Do you have another 25 to wait? Yes, I know you’ll only be taking out $295,000, but that off of $1,000,000 still knocks you down to $705,000, which isn’t bad at all, but to get back to the power of that $1,000,000 it’s going to take 6 years to get back there, and on top of that, the 705k in15 years investing 15k per year (3% inflation) is going to be a tidy $2,286,545 (click the image to enlarge)
Now that’s not too bad at all, and I’m not knocking it – I hope to be somewhere around there soon too, but think if you leave that $1,000,000 in there for the next 15 years and add 15k per year at 3% inflation you’re looking at $3,077,503 (click the image to enlarge)
Doesn’t that look better? By keeping that money there, you’re banking $790,958 MORE than by taking out the $295,000 that you “thought” you were taking out – but that’s only the beginning -
2. The 401k is set up as a RETIREMENT account – you shouldn’t be dipping into that bucket, that’s what you set it up for, RETIREMENT, not “HOUSE PAYING OFF” – 
You clearly make enough money to be able to put money away, so why cut the compounding interest short by hacking it into quarters? It’s for retirement, I’d leave it that way!
3. Taxes, taxes, taxes – You’re going to get raked over the coals taking out 401k $ now to pay for your house – not only are you going to have to claim the 401k money as income for the year, that’ll toss you into the highest possible IRS tax bracket at 35%!
Schedule Y-1 — Married Filing Jointly or Qualifying Widow(er)
| If taxable income is over– | But not over– | The tax is: | $0 | $15,650 | 10% of the amount over $0 |
|---|---|---|
| $15,650 | $63,700 | $1,565.00 plus 15% of the amount over 15,650 |
| $63,700 | $128,500 | $8,772.50 plus 25% of the amount over 63,700 |
| $128,500 | $195,850 | $24,972.50 plus 28% of the amount over 128,500 |
| $195,850 | $349,700 | $43,830.50 plus 33% of the amount over 195,850 |
| $349,700 | no limit | $94,601.00 plus 35% of the amount over 349,700 |
That’s a pretty penny to pay out, especially if you’re used to the 25% bracket you’ve been in. An additional tax on an early distribution is 10% of the taxable amount. The taxable amount is also included in your taxable income. This 10% tax is in addition to regular income taxes. So you’re giving 45% away right there to ol’ Uncle Sam.
4. Your mortgage interest is a tax write off. I don’t know how your mortgage is structured, but I DO know that when your mortgage is paid off, you won’t have that write off.
5. Even if you DID have an extra $2000 to put somewhere each month instead of paying your mortgage, your nest egg is now at $705,000 and even if you put $2k more each month or 24k more per year on top of your 15k, for a total of 39k per year, you’re going to be sucking tailpipe to your $1,000,000 you would have had making regular distributions(click the image):
vs.
By putting $39,000 per year into an investment making 10% with 3% inflation, you’re going to bank only $2,920,604, which is $156,899 less than if you would have kept that $1,000,000 in there and made standard 401k donations. If you never wanted to see that 157k extra, I guess it’s no big deal though.
So ultimately I’m saying it’s probably not a great decision. A few things you COULD do though:
1. Ask your plan administrator if you can borrow against your 401k plan; take out a loan to pay off your mortgage, the money would still be working for you, but you’d have to pay it back, but that’d be better than just taking it out -
2. Do you have a ROTH? The tax benefits might be better (I strongly suggest NOT doing this) but you can take out the PRINCIPAL that you have put in to it at no tax consequence, but suggest against it – see response #1 at the top of this page and check out this post on it here.
3. Just contribute $100-$200 more per month to your mortgage – it’s amazing what a few extra dollars per month will do to melt away the balance. Ask Money&Happiness, BuildingEquity, LivingAlmostLarge, or MyMoneyBlog.
If anyone else has any info, feel free to share, but from my perspective, I think you’d be making a bad decision to take 401k money and use it towards your mortgage, but like I said, I’m no professional financial guru. 
Filed Under: 401K • Debt • House • Investing • Net Worth • Portfolio • ROTH IRA • Readers Requests • Real Estate • Retirement • advice • financial education
Good advice I would have said the same thing.
First of all what is the rush? If he has a fixed rate mortgage. No need to rush to pay it off.
He ia still young, therefore he can afford to wait.
I say keep investing!
Good advice all the way through. Another option if he insists on paying the mortgage off sooner is to stop paying into the 401k and put that after tax money towards the mortgage.
The whole decision is if he’ll make more on his investments than he’ll pay on the loan + the tax write off.
Personally, I make more in the market so I don’t overpay my mortgage. History is on the stay invested side.
Good advice all the way through. Another option if he insists on paying the mortgage off sooner is to stop paying into the 401k and put that after tax money towards the mortgage.
The whole decision is if he’ll make more on his investments than he’ll pay on the loan + the tax write off.
Personally, I make more in the market so I don’t overpay my mortgage. History is on the stay invested side.
Thanks for the feature Hank! I was pretty much on the same line of thinking, but I like to look at things from every angle because we’re talking about my nest egg here! The wife and I have been working hard on this for years and don’t want it to break too early! I have a feeling I know what the rest of the world is going to say, and I guess I just needed to see it all out in writing first to know!
Many Americans are having a difficult time making mortgage or credit card payments, and we talk to people every day who thinking about borrowing against their retirement accounts to pay off their debts. While it might be tempting to pay off your credit card debt by borrowing against your 401k, you might want to re-think that strategy.
There are many ways you can pay off your debt and bills before touching your 401K or your other retirement funds. When you are faced with bills and debts that are piled higher than your eyes, your vision and judgement can be heavily impaired, as if you are driving behind a SUV. The very first thing you should do is really look at your overall financial picture, determine your viable sources of money and decide if you should cash out your 401k to pay bills and your debt.
[...] Should I use my 401k to pay off my mortgage? [...]
I am not really good in handling money and about mortgage too. I got to know my friend newly married have bought a new home and they need to pay off the mortgage in 20 years. Yeah long term but both are working so they will be just fine.
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I agree with the general concepts about leaving your 401K intact, however after seeing my 401K lose over 40% in the last few months, and with the doomsday mentality in the media, I am seriously considering taking some 401K money to pay off my remaining mortgage. I’m 55 years old, so I would be penalized and taxed to the max.
I’m anticipating losing another 40-50 percent on my 401K due to the falling economy – someone please explain to me why I shouldn’t use the money (even with the penalty) to become debt free by paying off the mortgage balance.
Thanks!
Rufus, I’m right there with you! My husband is 53, I’m 52 and we have watched our 401K cut by 44%! Just as alarming is the fact that our income has also taken a huge hit at a whopping 36%. We are down to a mortgage balance of 44,000 and our retirement account now has a sad balance of 186,000 which of course will more than likely take more hits as time goes on. Additionally, we now are hearing that we my have no jobs at all by fall! So, bottom line is survival and we are seriously considering paying off our home with money from our 401K so we can at least survive if we have no income other than unemployment and our savings account. I challenge anyone to convince me that the roof over our head is not one of our biggest priorities! Personally, I think the current penalty on early withdraws should be eliminated during a time when so many people are without an income. A greedy government combined with greedy bankers and we have the disaster we see today. So……someone please explain to those of us in our 50 why we should risk being homeless and go through the mental torture we are being presented with. For goodness sakes, we are seeing people commit suicide over financial worries……..and someone wants to tell me we shouldn’t save our homes with money from our 401K? And then the government wants to penalize me for using money that is mine? Truly……..this is insanity at its worst.
One more thing…….we have no car payments and no credit card debt. But, living on unemployment for an extended period of time? I seriously don’t see how folks are doing it.
hi, come to wish you happy new year
about mortgage I am not good with it.
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I would say that if your interest rate is high pay it off. Your money is much better off being in your home right now.
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