Welcome Guest. Sign in or Signup 

2 Answers

Should I Use My 401k To Pay Off My Mortgage?

Asked by: 2485 views

I’m 44 years old with approx. 9 years left on a mortgage with approx $100k left to pay. I’ve been fortunate to save for retirement since age 17 and have approx $250k in various 401k’s, IRA’s and Roth IRA’s. I currently make a salary of $70k per year. I’m married and my wife works part time.

I’m thinking of taking a portion (50%) of my sizeable IRA to pay off home loan.I already contribute 6% to my 401k at work and my company adds 4.5% (so no IRA deduction).

With no mortgage payment, I can invest part of those funds by maxing out 401k contributions to my company account thereby reducing taxable income. This offers a better tax break than mortgage interest deduction could at this point in time.

Any extra funds no longer going to the mortgage can be invested in my Roth IRA. I will also still maintain my existing IRA.

The big question is how much extra would one have to invest to make up for penalty and missed interest associated with an IRA withdrawal?

Haven’t seen this scenario evaluated. Has anyone else?

2 Answers



  • +2 Votes Thumb up 2 Thumb down 0

    Pinyo on May 29, 2010

    Marty, thank you for your question. This is very interesting mainly because I have very similar numbers as you do, although not exactly.

    To keep this short, I don’t think your idea will work out. Early non-qualified withdrawal from your Roth IRA — which I believe this is — is subjected to taxes and early withdrawal penalty [source]. So regardless of the source — i.e., IRA, Roth IRA, or 401k — you are likely looking at 25% taxes (at your marginal tax rate) and 10% early withdrawal penalty. This means that you have to withdraw over $150,000 to pay your $100,000 mortgage.

    I don’t think the extra cash flow or extra contributions to your 401k can realistically make up the difference.



  • +1 Votes Thumb up 1 Thumb down 0

    JoeTaxpayer on May 29, 2010

    Marty. Don’t Do. It.

    First the IRA deduction phaseout is for modified AGI of $89,000 to $109,000 for Married Filing Joint. Not sure if you hit that?

    Let’s review your marginal rate. See Fairmark for where I got these numbers. You said you make $70K but didn’t mention the Mrs’ income. Hmm. For MFJ your rate on taxable income is 25% for income above $67,900. But, you have 2 exemptions, $3650 each, or $7,300. And if your mortgage rate is low, let’s assume the standard deduction of $11,400. So $18,700 comes off the top. So, it’s closer to $51K plus your wife’s income. Up to $17K taxed at 15% over that, 25%. But you say you are contributing to the 401(k), so you may very well be right at the 15% rate. So to Pinyo’s point, you’d be in the 25% bracket (plus 10% penalty) for withdrawals, while boosting your 401(k) next year only saves you 15%.

    Here’s my suggestion. Reply if it makes no sense or you have a new question. You want to stradle that line, ending the year right at a taxable $67,900. Put what you will in the 401(k) to get maximum matching, then use Roth deposits to put away money never to be taxed again. Right at year end, if you are more than $1K or so below the $67,900, convert some IRA money to Roth and pay tax at 15%.

    Don’t think of paying 35% to withdraw money to pay off the mortgage, it’s not worth it. I don’t even need to run a spreadsheet, you can’t break even on this. If you have extra money now, why not just pay extra to the mortgage? Pay about 1/3 more, and it will drop from 9 to 6 years. My strategy of straddling the 15/25 line will serve you well, and minimize your lifetime taxes, year by year.


Answer Question

Please Sign in or Sign up to leave an answer

Copyright © 2007-2012 by Moolanomy.com. All rights reserved.