mortgage

Can I raid retirement to pay mortgage?

Don TaylorDear Dr. Don,
If I use my retirement plan money to pay down my mortgage, will I have to pay a penalty?

Thanks,
-- Nelson Nickels

Review mortgage rates in your area.

Dear Nelson,
It depends. The 10 percent tax penalty covers early distributions taken from your retirement accounts. That's before age 59 1/2, with some exceptions. Unfortunately for you, one of the exceptions does not involve paying down your mortgage.

If you separate from service (or work) after age 55, you may take distributions without penalty from the company's 401(k) plan. It goes down to age 50 if you're a police officer, firefighter or medic. The separation from service provision doesn't apply to traditional or Roth individual retirement accounts.

Roll of $20 bills in nest © martellostudio/Shutterstock.com

If you're still working for an employer, your ability to take early distributions from your 401(k) plan is governed by the specific plan documents. Plan loans and hardship distributions are the two main provisions for accessing your money prior to separation from service. A plan loan to pay off your mortgage doesn't make much sense to me. Paying down your mortgage doesn't generally qualify as a reason for a hardship distribution.

If you're already retired and over age 59 1/2, then you won't owe the penalty tax on early distributions. You will owe income taxes on distributions coming out of a tax-deferred retirement account. Taking out a big lump sum may move you up to a higher tax bracket, so you should look to reduce that impact.

Is it smart to raid your retirement accounts to pay down your mortgage? If taking this step will drain your retirement accounts, I'd recommend against it. You need to preserve your financial flexibility for the future. If you need that money later, you might be forced to get a home equity line of credit or home equity loan, a cash-out first mortgage or a reverse mortgage.

At issue is the trade-off between financial flexibility versus the financial safety net provided by retirement savings.

If paying off the mortgage was your goal for your retirement savings, then you should have been working toward that by making additional principal payments over the years.

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