Using Retirement Money to Pay Off the Mortgage

But I would do that one month at a time with small withdrawals rather than a large single withdrawal.

An even better idea, D.P., would be to use non-401(k) sources -- such as any severance pay or any non-retirement savings -- to make monthly payments at least through the end of 2009. Then if needed, make monthly withdrawals from the 401(k) account in 2010 when your family income will likely be lower if your wife has been unable to find work by then.

Finally, also keep in mind the low interest rate of 4.75 percent you're paying on your mortgage compared to the 3.64 percent rate of return you're say your wife is earning on her 401(k) account. That's not a big difference, and the difference gets even smaller when you take into account your possible tax savings from the mortgage interest deduction.

On the whole, D.P., I understand the urge to pay off the mortgage now that your wife is facing unemployment. We'd all like to rid ourselves of our monthly mortgage burdens, but in this case I think the important thing is to avoid making a bad situation worse with a higher tax bill.

For now, sit still and re-evaluate the situation next year.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

David McPherson is founder and principal of Four Ponds Financial Planning in Falmouth, Mass. He previously worked as a financial writer and editor for The Providence Journal in Rhode Island. He is a member of the Garrett Planning Network, whose members provide financial advice to clients on an hourly, as-needed basis. Contact McPherson at david@fourpondsfinancial.com.

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