Since I Can Withdraw 401(k) Funds Penalty-Free, Does It Make Sense To Take Money Out and Pay Off My Mortgage?

Craig Johnson | March 3rd, 2021

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Welcome to Ask Clark, a column designed to answer your financial questions, by money expert Clark Howard.

Should I Pull Money Out of My 401(k) To Pay Off My Mortgage?

Chris from Illinois asks: “Given the once-in-a-lifetime opportunity to pull money out of a 401(k) penalty-free, does it make sense to pull the money out and pay off the remainder of my mortgage?

“I have approximately $60,000 left on my mortgage, which is at 4% interest and approximately $60,000 in my 401(k). My family has a good amount of school loans at a high-interest rate that we are working to pay off as well.”

Clark’s Take on Whether You Should Withdraw Funds From Your 401(k) To Pay Off Your Mortgage

Clark says: “You have to show that you’ve been economically harmed by coronavirus in order to be eligible for the penalty-free withdrawal from your 401(k), but it doesn’t exempt you from the tax. It only exempts you from the 10% federal penalty.”

“My preference is that you leave your 401(k) be. Because over time and over the years, you’re likely to outearn that 4% mortgage rate you have, and I’d rather that you have that money there for your retirement,” Clark says.

Clark adds: “Psychologically it feels great to pay off your home, but you can’t eat your house. You need money for living expenses, and I’d rather the 401(k) continue to grow and you pay the mortgage as agreed.”

If the conditions are right, another way to pay off your mortgage more quickly or reduce your monthly mortgage payment is to refinance. Read about Clark’s magic rule before you start exploring your mortgage refinance options.

To hear Clark’s full take on this question, listen to the segment:

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