Should I Cash Out My 401K to Pay Off My House? – Carol

“Dear Steve,

I lost my job. I am 65 years old and have a401k for $17000.00. Should I cash in my 401K to pay off my house.


Dear Carol,

My gut reaction would be not to. Here is why.

Your 401K is designed to assist you in your older years. These days 65 is still middle age it seems. It is not time to retire.

If you tap the 401K over what you are allowed to take out there may be a tax penalty and you’ll just lose more money than you’ve already lost with the market downturn.

The 401K funds may be needed to feed you while you look for a replacement job. I assume you are doing that. You can’t eat house for dinner.

I asked my friend, Paul Bennett, a Certified FInancial Planner with C5 Wealth Management, what he thought about your situation. Here is what he said.

“As a common practice, I do not recommend that you pay off your mortgage as long as you have a competitive interest rate. The reason is because you get a tax deduction for the interest that you pay on your mortgage. For example, if your mortgage interest rate is 5-7%, after the deduction it is really only 3.5-5.5%. Your investments should outperform 3.5-5.5% over the long term (believe me; I know this hasn’t been the case recently, but try to stay focused on the long-term).

Not only does cashing in your 401k not line up well with what I’ve described above, you also end up having to pay taxes on the entire balance withdrawn – a double whammy! Do you have any other resources, either assets or pensions? If so, you’ll need to determine if you monthly inflows (from pension(s) and investments) are greater than your monthly outflows/spending. If so, then you’re in good shape. If not, then you’ll need to re-budget (cut back on spending if at all possible). Also, if you are eligible for Social Security you can start drawing it as early as age 62, which may make sense for you to do if you aren’t doing so already.”


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8 thoughts on “Should I Cash Out My 401K to Pay Off My House? – Carol”

  1. My husband lost his job 1 year ago August 1st. He is 60 years old. We have a home loan of 102,000 @ 8.9% very bad. The bank would not help by lowering % rate. We have 150,000 in retirement. We have no money to even pay bills now. We get un-employment, but our 1,150.00 per month payment leaves us with 850.00 for everything else. We are sinking fast. No other money anywhere. He is going to school in what is called the trade act which is to give him better skills to find a job. We feel we must take money out to pay off home, or we will lose it. Any advice?

  2. Hi,
    I lost my job at 55, just recently, my 401k has been around 70k for the last 8 yrs, no growth, and before that maybe 5%.  My mortgage is 68k on a place only worth maybe $130k, I am paying $2.5k a year interest for 18 more years. The market is a bad place to have a 401k unless you have been able to move your funds around, overall I have lost over $60k in it.  If I have trouble finding a job, end up filing chapter 7 due to over $50k in unsecured debt, afterwards taking half the money at the end of the year to pay down the house, the other half the next year to pay it off, will save me over $30k in interest immediately minus $6k in penalties.  I was really hoping to make it to 59.5 before having to do this, but with this economy…I will be taking any job I can find after unemployment runs out. But if you don’t own your home when you retire with just social security, you’re screwed.  I’ve seen it happen to family more than once.  If you have any better thoughts I’d like to hear them.

  3. We are 57 and both working although I am self-employed.  We had to declare bankruptcy and give up our home 3 years ago.  We are in a Chpt 13 plan with 2 more years of payments because we make good money.We have money in a 401k, but only about 100K, we expect to have about 200k by the time we retire (66) I want to take 401 K money at 59 1/2 and pay cash for a house so we will have no housepayment then and when we retire. We wouldn’t be able to afford the rent where we live if there were not two of us. We pay a lot of rent now, and I don’t feel secure.  I also feel like if someone gets sick, we will lose all the 401k money anyway and it would be safer in a house.  Yes, No, Maybe?

    • That seems reasonable. It lowers your expenses in retirement and essentially the money is used for your retirement benefit and not taken with a penalty.

      What is yet to be determined is if the U.S. housing market will be going up or down by that time. It would be a shame to use that money for a depreciating asset.

  4. Steve,
    When I turn 59 1/2, should I cash in my retirement accounts to pay off my house. I plan and can work till I am 65 or older and would be able to save over $5000 a month if I had my house paid for.
    The reason I ask is: when I enter the “prepayment” numbers in the calculators, they always say I am saving hundreds of thousands of dollars by prepaying.


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