Should senior withdraw from 401(k) to get rid of mortgage?


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Dear Senior Living Adviser,
I’m over 65. Should I withdraw money from my 401(k) that’s currently earning 2.5% to pay off my mortgage that’s at 6%?
— Bill Bungalow

Dear Bill,
It seems like a slam-dunk, but it’s not that straightforward of a decision. You didn’t say what the mortgage payoff would be, how much you have set aside in your 401(k), your other sources of retirement income and whether you’re still working. (I’m going to assume you’re retired.)

Lamenting that you’re only making 2.5% on your retirement savings while paying 6% on your mortgage may say more about how you’ve got your retirement account invested than it does about the economic sense it makes to raid the account to pay off the mortgage. You may need a financial adviser more than you need a lump-sum distribution.

While you don’t have to worry about the 10% penalty tax, if you take a large distribution, you could go up a tax bracket (or 2), increasing the tax bite and the amount of money you’ll need to pay off the mortgage.

I’ve long advocated that paying off the mortgage before you retire is a sound financial goal. Where I’m on the fence is whether you should raid your retirement account to finance that goal. You’ve spent your working career accumulating wealth in your retirement account. Raiding it to pay off the mortgage frees up that money in your monthly budget, but you lose the financial flexibility associated with the lump sum you took out of your 401(k).

What’s more important to you: Losing the mortgage payment, or keeping the money invested for future financial needs?

There are ways to tap the equity in your home in retirement, such as a home equity line of credit or reverse mortgage. But that puts you back into mortgage debt, and you’re considering raiding your 401(k) to get out from under mortgage debt.

Ask the adviser

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