I’m 60 and want to withdraw $250,000 from my 401(k) to pay off the mortgage and bills. Is that a smart thing to do?

Dear Reader, 

So many people write in asking if they should pay off their mortgage with money from their retirement accounts (and I’ve responded to quite a few). I wanted to respond to your question, however, because it’s something I think a lot of people fall victim to, especially when planning for retirement, and that is looking at something from a lens that is too “big picture.”

Don’t get me wrong. It’s important to think big when you’re planning your retirement, but there’s no way to say if a move is the “smart thing” to do or not without all of the minute details. For example, $250,000 is a lot of money to withdraw from your 401(k), but you probably wouldn’t feel that way if your portfolio is $2.5 million. That kind of withdrawal would probably bring you a pretty big tax bill, but perhaps not too much of a surprise to you if you were already in the highest tax bracket. 

Those are just examples, but they give you an idea of how to frame the question in a way that takes into account your own personal circumstances. 

Before you make any decisions, take into consideration all of the financial repercussions of such a distribution. Think about what money you have earmarked for retirement, and if that kind of withdrawal could possibly put you at risk down the road.

Assuming you’re still working (you can only contribute to an IRA with earned dollars), is there a way for you to pay off your debts without such a big withdrawal from your 401(k)? Do you have a plan for how to make that money up in your portfolio before you retire? And have you considered the possibility that you wouldn’t be able to make it up before you retire for good? 

Not everyone wants a mortgage hanging over their heads when they retire, and for good reason. A lot of the time, retirement income is limited to pensions, Social Security and personal savings and investments. It would probably be nice to not have that bill every month, and you could take that cash and use it elsewhere. 

But if you’re able to afford the payment, if it doesn’t have any challenging terms (such as a higher interest rate in a few years), and if you have a plan in place to pay it off by the deadline, is it something you need to do right now? Especially if it means taking away from your future, older self? 

Keep in mind: when you withdraw from your 401(k), not only are you paying taxes on that distribution, but you’re also curtailing potential investment returns since the balance will decrease so drastically. 

You clearly are thinking about the future — I imagine that’s why you want to open up an IRA — so why not try to rearrange the way you are thinking about using your money? Before dipping into your 401(k), write out your cash flow (that is, the sources of income you have and the fixed expenses you pay) as well as some of the expected expenses you’ll have in the near and long term. Think healthcare, taxes, groceries, any other necessities and of course the unexpected emergencies, too. Now how do you feel about that withdrawal? 

There may be a way you can expedite debt payoff without such a huge chunk coming out of your nest egg. If you can do that, your future self will thank you. 

If you’re turning 65 this year and want to share your story, contact us at HelpMeRetire@marketwatch.com.

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