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Should I use retirement savings to pay off my mortgage?

September 7, 2012: 6:30 AM ET

I will be retiring in August 2019, and the balance on my mortgage will be more than $100,000. Should I withdraw that sum from my 401(k) to pay off the mortgage? — Angela A.

If you are uncomfortable carrying a mortgage into retirement, ask yourself whether you are in a position to pay down the mortgage while you are still working. "You might be better off accelerating payment on the mortgage now rather than drawing on your 401(k) later," says Tom Fisher, owner of Fisher Financial Strategies in Cambridge, Mass. This might mean refinancing to take advantage of record low interest rates.

If you wait and pay the $100,000 balance using 401(k) assets, you'll have to withdraw more than the $100,000 balance in order to cover the income taxes on your withdrawal. Fisher also points out that the assets in your 401(k) are benefiting from tax-deferred growth. Pulling more than $100,000 out of your savings so early in retirement means you'll lose out on the potential for decades' worth of tax-deferred, compound growth.

Instead, directing more funds to paying off your mortgage now, with low interest rates and an accelerated payment plan, means you may be able to pay down all or most of the debt before you retire. However, if you are comfortable budgeting for mortgage payments past retirement, you can refinance for a longer period.

— Austin Kilham

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