Should You Use Your 401(k) To Pay Off Your House?

Core Insights - The article discusses the implications of using a 401(k) to pay off a mortgage, highlighting both benefits and drawbacks. Benefits of Paying Your Mortgage Faster - Utilizing a traditional 401(k) to pay off a mortgage can eliminate monthly mortgage payments, significantly enhancing monthly cash flow, potentially by thousands of dollars [3] - Paying off a mortgage early can save homeowners tens of thousands of dollars in interest over the life of the loan, making it an appealing option [3] - Transferring wealth to heirs can be easier and less costly when a house is involved, as it can pass tax-free, unlike a 401(k) which incurs taxes upon withdrawal by heirs [4] - The cost basis of a house steps up to its current market value upon the owner's death, allowing heirs to potentially avoid capital gains taxes, resulting in significant tax savings [5] Drawbacks of Using Your 401(k) - Generally, withdrawing from a 401(k) to pay off a mortgage is not advisable, as the investment returns in a 401(k) often exceed the interest rates on mortgages [6] - Even conservative 401(k) allocations typically yield at least 5%, while many mortgages cost homeowners less than 5%, making the financial decision questionable [7] - Withdrawals from a 401(k) are subject to ordinary income tax, which can significantly reduce the effective amount available for mortgage payoff, especially for those in high tax brackets [7]