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Q&A: "I'm Changing Jobs Soon and my Wife is Thinking of Retiring in the Near Future. Should we Pull Money out of my 401(k) to Pay Down the Remaining Balance on our Mortgage?"

Retirement Accounts Tax

Question and background: 

I am married 58 years old, my wife is 55. We are both nurses in Alabama, We earn about $94,000 a year. I am about to change jobs after 27 years, my wife may not be able to work too much longer. We currently owe approx. $34,000 on our mortgage. In my 401k plan I have about $150,000. My next job will not allow me to put anything into a 401k plan until after I have been employed for one year. If I remain healthy, I plan to work several more years. My question: Should I withdraw enough money to pay off my mortgage? And what should I do with the remaining?

Answer: 

I'd advise against it unless it was your only option and/or you could structure it in a way that minimizes the tax hit (i.e. withdrawing and paying down over a few years).

Why? 

(1) You've already lined-up another job. Your wife is thinking about retiring in the near future but hasn't yet done so. So you folks are not in a financial predicament that has your backs against the wall and unable to pay the mortgage.

(2) Depending on your deductions, you and your wife are probably at the lower end of the 25% federal income tax bracket, maybe near the top of the 15% bracket. Add Alabama income tax to that. Let's just use 30% total for illustration purposes. While you can distribute from your 401(k) after age 55 without paying the 10% federal penalty tax, you'd still need to withdraw about $48,600 from your 401(k) to cover the $34,000 mortgage on an after-tax basis. Presumably, you'll need those funds in retirement...yes? 

Even though your new job won't allow you to contribute to the plan for one year, the plan may allow you to transfer-in your current 401(k) balance. You could check with HR. And if the new plan has good investment options and reasonable expenses, you may wish to do that. On the other hand, you can always roll your current 401(k) balance to an IRA and manage it (or hire an adviser to manage it for you).

Hope that helps. All the best.