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Dear Trusted Wealth Coach,

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I’m considering taking what’s left over in a 401(k). Will I be allowed to withdraw it all at once? I want to use a portion of it to help pay off my mortgage, now that I’m over 59. I still intend to work longer. How does this affect me in terms of taxes? – magnificence

Thanks for the question Shana! Depending on the terms your employer has set for your retirement account, it may be possible to take every dollar out of your 401(k) in a lump sum.

While it’s a good idea to be mortgage free before retirement, I’m not convinced that depleting a retirement savings account is the best way to pay off the mortgage. Why here?

You Could Take a Significant Tax Hit

A 401(k) is a tax-advantaged retirement account. Your contributions are not taxed before you put money into the account. But any amount you withdraw is generally subject to federal income tax, and possibly state income tax, depending on where you live. This is true whether you withdraw at 29, 59, or 79.

If you withdraw money from a 401(k) before age 59, that amount is also typically subject to a 10% penalty in addition to regular taxes, although there are some exceptions. Since you’re over 59, you won’t pay that penalty, but your withdrawals will almost certainly be taxed. And of course, the larger the amount you withdraw, the bigger the tax bill on it.

The tax rate applicable to the amount withdrawn will be based on your total income for the year in which you make the withdrawal, and the tax hit here could be even higher. Without knowing your annual income or how much you have in your 401(k), I can’t give you an idea of ​​what your tax hit might be. But here’s an example of how a large withdrawal can affect your tax burden.

Let’s say your annual income is typically $75,000 per year, you file as single, and take the standard deduction. Your income will probably be subject to a 22% federal tax rate, and your federal tax bill will be approximately $9,500. But if your 401(k) withdrawal doubles your annual income to $150,000 and nothing changes, your new tax rate will be 24%, and your tax bill exceeds $27,000.

Additional Considerations

Shana, you also don’t say if this 401(k) is your only retirement savings or if you have money in other accounts like an IRA or a separate employer 401(k). If this is your only retirement account, I caution you against eliminating it entirely, especially when it looks like you’re nearing your retirement age.

Even if you want to continue working in retirement, it’s important to save for your golden years. Withdrawing all of your money and using it to pay off your mortgage will save you the interest you would otherwise have paid on that home loan if you were in your 401(a). That loss could potentially outweigh the interest savings you’d expect to get from the paid-off mortgage.

Other ways to pay off your mortgage faster

If your goal is to pay off your mortgage faster and save money while doing so, refinancing your existing mortgage may be a good option for you. Although interest rates have risen in recent months, they are still relatively low. If your mortgage is more than five years old, refinancing now can get you a much lower interest rate.

If you also choose a shorter repayment term — such as 15 years instead of 30 — and make additional payments, you’ll pay off your mortgage even faster.

Another option could be a 401(k) Loans, if your employer allows them. You can borrow against your 401(k) to pay off your mortgage, and then likely repay yourself at a much lower interest rate. This will allow you to pay off your house, save on interest, and preserve your retirement funds.

Ready to learn more? Check out these articles…

  • How much can I earn as a retiree before paying taxes on my income?
  • Should you pay off your mortgage or invest the money?
  • How to pay off your mortgage early: 5 of the best options to explore

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About the Author: Laura Adams is a personal finance and small business expert, award-winning author, and host money girl, a top-rated weekly audio podcast and blog. She is frequently cited in the national media, and millions of readers and listeners benefit from her practical financial advice. Laura’s mission is to empower consumers to lead prosperous lives through her speaking, spokesperson and advocacy work. She received her MBA from the University of Florida and lives in Vero Beach, Florida. follow him LauraDAdams.com, instagram, Facebook, Twitter, And linkedin,