Cash in 401(k) to pay mortgage?

Don TaylorQuestionDear Dr. Don,
I plan to retire in about four years at age 66. My home mortgage will have about 11 years remaining. Should I cash in my 401(k) and pay off my mortgage?
-- Jerry Jericho

AnswerDear Jerry,
I think it's a great financial goal to plan to have your mortgage paid off prior to retirement, but I don't think it's such a great idea to cash in your 401(k) to reach that goal.

You want to preserve a measure of financial flexibility.

Cashing in the 401(k) has you taking a big tax hit all at once, which will put you in a higher marginal federal income tax bracket for that year. It also has you concentrating your investments into one investment -- your home. Sure, you should be able to get a home equity line or loan against it if you need funds, or even a reverse mortgage, but that puts you back into a mortgage.

If you're still contributing to the 401(k), you could reduce your contributions down to the limit of any company match and use the freed-up funds to make additional principal payments on the mortgage. You can also use the reduction in payroll taxes in 2011 toward additional principal payments. Chip away at the mortgage balance over the next four years while you're still working and see where things stand at retirement.

My rule of thumb is that it makes sense to prepay the mortgage when the after-tax return on your investments is less than the effective rate of interest on your mortgage. If you've dialed down risk in your retirement portfolio, you may be in a position where it does make sense to pay down the mortgage. Just don't do it all at once, and work with your tax professional or financial planner to time the distributions out of your 401(k) to minimize the tax impact.

Get more news, money-saving tips and expert advice by signing up for a free Bankrate newsletter.

Ask the adviser

To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "Financing a home," "Saving & investing" or "money." Read more Dr. Don columns for additional personal finance advice.

Bankrate's content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate's Terms of Use.

News alert Create a news alert for "mortgages"


Show Bankrate's community sharing policy
          Connect with us

Timely market news and advice for consumers ready to buy, sell or invest in real estate. Delivered weekly.


David McMillin

CFPB slaps Flagstar Bank with $37.5 million fine

Michigan-based Flagstar Bank is paying the price for failing to help homeowners and breaking the Consumer Financial Protection Bureau's new mortgage-servicing rules.  ... Read more

Partner Center

Connect with us