John Csiszar

Mon, Jun 23, 2025, 7:01 AM4 min read

Saving for retirement, whether it’s through an individual retirement account (IRA) or 401(k), is typically top of the list for everyone’s financial goals. However, when it comes to long-term personal finances, how can your 401(k) contributions combat your real estate woes?

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Using your 401(k) plan is not generally the best way to pay off your mortgage early or even subsidize your monthly payments. Still, if you’re thinking of going in that direction, you should know what the pros and cons are of using your retirement money to get your mortgage paid, along with the steps you should take to do it.

Here are the things you should factor into your decision, along with consequences you won’t want to overlook.

The main benefit to using your traditional 401(k) to pay off your house is that you’ll no longer have to worry about making mortgage payments. If you’re like most American households, this will provide a significant boost to your monthly cash flow, possibly in the thousands of dollars.

You’ll also avoid paying potentially tens of thousands of dollars in interest over the life of your mortgage. This alone could make the idea of paying off your home early make sense.

Another factor that many overlook when it comes to paying off your mortgage is that it can make the transfer of wealth to your heirs easier and less costly. If you pass on a 401(k) to your heirs, all of the money in the account becomes taxable as your heirs withdraw it. But in a house, your money can potentially pass to your heirs tax-free.

This is because upon your death, the cost basis in your house “steps up” to the current market valuation. If your heirs sell the house, they will likely pay only small or even nonexistent capital gains. That could amount to tax savings of tens or even hundreds of thousands of dollars for your beneficiaries.

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In most cases, taking money out of your 401(k) plan to pay off your mortgage is a bad idea. From just a strictly mathematical perspective, you’re likely earning more in your 401(k) plan than you are paying in interest on your mortgage.

Even if you have a relatively conservative 401(k) allocation, for example, you’re likely earning at least 5% on your money. Considering that most existing mortgages are costing homeowners less than 5%, the math doesn’t make sense.