Pay off your mortgage before you retire? Five questions to ask first

The case

In Case File No. 2, Linda owes $120,000 at 4% with 11 years left and a $1,125 monthly payment (principal and interest). Her sister Denise says to pay it all off today, from the 401(k). Is she right? Here are the five questions that decide it.

Question 1: Where would the money come from?

This matters most. Money from a savings account has already been taxed. Money from a traditional 401(k) or IRA has not, so to net $120,000 you must withdraw more, because the withdrawal is taxed as income. This is called a gross-up.

In Linda's case, a lump sum from the 401(k) would require a withdrawal of about $147,051, with a federal tax cost of about $27,051. That uses up 57% of her account. The interest it saves is $28,533, so the net gain is only about $1,482, for taking more than half the account.

Case File assumptions: Linda is 61, married filing jointly, with $80,000 of yearly income, $40,000 in cash, a $260,000 traditional 401(k) and Social Security of $2,000 and $1,100 a month. State tax is left out.

Question 2: What is the loan rate, compared with safe money?

Paying down a loan is a guaranteed return equal to the loan's interest rate. Compare it with what you could earn on safe money, such as insured savings or Treasury bills, after tax. If your loan costs more than safe money earns after tax, paying it down looks good. If safe money earns more, the rate alone does not push you to pay it off. In Linda's case, the two are close, so the rate does not decide it. Where the money comes from does.

Question 3: How much cash would be left?

Cash is flexibility. Money paid into a house is hard to get back out. This site flags a cash cushion under six months of spending as a warning light. It is a rule of thumb, not a law. Linda has about 9 months now. See how to count your cushion.

Question 4: What happens if one Social Security check disappears?

A fixed mortgage payment does not shrink when one of two Social Security checks stops. Linda's payment of $1,125 is 36% of the household's Social Security of $3,100 a month. If one check disappears, the payment becomes 56% of the remaining $2,000 check. Paying the loan off, or at least finishing it, before then protects the survivor. See how survivor benefits work.

Question 5: Does a withdrawal cross a Medicare line?

A big withdrawal from a retirement account raises your income that year, and Medicare uses your income from two years earlier to set your premiums. Linda's lump sum would bring her income to about $227,051, over the $218,000 line for a married couple, which triggers the Medicare surcharge. Spreading the withdrawal over three years would cut the tax to about $16,364. How the surcharge works.

The third way: the paycheck plan

Instead of one big move, Linda can send an extra amount each month from her paycheck. At $752 extra a month her loan is gone in 73 months, by age 67, and she saves about $13,355 in interest, with no tax bill and her retirement account untouched. That is the Case File's verdict: pay it off, but from the paycheck, not from the 401(k) and not from the cash cushion.

Other things to check

• The mortgage interest deduction. Most households take the standard deduction ($32,200 for a married couple in 2026), so the deduction often adds nothing.
• Prepayment rules. Ask your lender how extra payments are applied. They should go to principal.
• Your other options. Investments might earn more than the loan costs, but with risk the loan does not have. That is a different question.
• Escrow. Property tax and insurance usually continue after the loan is gone. The calculator leaves them out.

The verdict is for Linda's facts. Test yours in the free Payoff or Keep It tool.