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Should I Use My 401(k) to Pay Off My Mortgage? – Edi

“Dear Paul,

My 401 k has lost 1.7% this year. I am 51 years old. I am wondering if I could use my 401 to pay off my mortgage. I have about $100,000 in my 401 and owe that on my house. I would be debt free.

Should I use the 401 to pay off my mortgage


Dear Edi,

The answer is “yes you could”, but from a prudent financial perspective, “no you shouldn’t”. The reasons are many and I review 3 here.

One, you would owe a 10% penalty on a pre-59 ½ withdrawal.

Two, you would owe taxes on the full distribution which could really increase your taxable income for 2011.

Three, you are robbing from you retirement nest egg.

Since I do not know the rest of your financial picture it is impossible for me to know the ramifications and impact that no longer having this asset would have on your retirement.

Most people these days don’t have pensions when they retire, and the burden has been shifted to employees to provide for themselves with 401ks, IRAs, personal savings, Social Security (while it lasts!), etc. Yes, you would be debt free, but you would also lose the tax deduction you receive for the mortgage interest you pay (at least under the current tax code!). Hope this helps.

Mr. Bennett is a Certified Financial Planner™ professional (CFP®), Chartered Financial Consultant (ChFC®), Accredited Investment Fiduciary™ (AIF®) and Managing Partner of c5 Wealth Management, LLC. He holds a Master of Science in Finance (MSF) with Honors from Indiana University – Kelley School of Business and a BA from the University of Florida. He is currently pursuing his PhD in Economics from SMC University. Mr. Bennett has completed the Advest Institute’s advanced program on portfolio analytics and behavioral finance at Harvard University.

He was recently recognized by Washingtonian Magazine as a Top Financial Advisor and Kiplinger’s Personal Finance Magazine, the Journal of Accountancy and the American Bar Association Journal as Who’s Who of Virginia Certified Financial Planner™ professionals. In addition, he has also been recently selected by the Consumers’ Research Council of America as one of “America’s Best Financial Planners”. He is a current contributor to the Rydex Advisor Benchmarking Index. He is quoted often in the press, has been featured on and has contributed to various publications such as U.S. News and World Report,, Advisor Today, Dow Jones News, Financial Advisor Magazine, Financial Planning Magazine, Investment News, The Washington Business Journal and The Washington Times.

If you have a questions about investing, financial planning, retirement, entrepreneurship, executive benefits and insurance (life, disability, long-term care, etc.) you’d like for Paul to answer, just use the online form. The help is free.

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