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He’s 63, he’s retiring in a few months, and he has one goal: walk away from his job with the house paid off.
Let’s say his name is Tom. He and his wife, Jan, also 63, owe $180,000 on a mortgage at 3.25%. Tom’s plan is simple: next year, after he retires, pull the money out of his 401(k) in one shot and write the check.
Tom and Jan are invented, but the plan is common, and the feeling behind it makes sense. Nobody wants a house payment in retirement.
I’ve been a CPA since 1981, and here’s what I’d tell Tom: before you write that check, look at the tax bill.
Money you take out of a traditional 401(k) and don’t roll over counts as taxable income in the year you take it. (1) Any taxable eligible rollover distribution paid to you is also subject to mandatory income tax withholding, generally at 20%. (1)
In 2026, the 22% bracket for married couples filing jointly starts above $100,800 of taxable income, and the 24% bracket starts above $211,400. (2)
Medicare can bite, too. In 2026, joint filers with income over $218,000 pay more than the standard $202.90 monthly Part B premium. (3)
And Tom’s 3.25% loan? The average 30-year fixed mortgage rate was 7.28% as of Oct. 1, according to Freddie Mac. (4)
Here are five reasons to rethink the one-big-check plan.
1. To get $180,000, he has to take out about $218,800
Let’s run Tom and Jan’s numbers, using 2026 tax figures for illustration. Assume they file a joint tax return, take the 2026 standard deduction of $32,200 and have $40,000 of other income, like a pension. (2)
Here’s the catch. Every dollar Tom pulls out of his 401(k) is taxed as income. So to pay off a $180,000 mortgage, he can’t just take out $180,000. He has to take out enough to cover the mortgage and the tax.
That works out to about $218,800. About $38,800 of it goes to federal income tax, and the remaining $180,000 pays off the house. (2)
Why so much tax? A withdrawal that big pushes much of Tom’s income into the 22% and 24% tax brackets. (2) And that’s before any state income tax.
2. Even then, his check comes up short at first
Here’s a second surprise. When you take a lump sum, the 401(k) plan doesn’t wait for you to file your taxes. It generally must hold back 20% of the withdrawal and send it straight to the IRS. (1) Think of it as a down payment on your tax bill.
On a $218,800 withdrawal, 20% is about $43,760. That’s about $4,960 more than the $38,800 Tom will actually owe.
So the check Tom receives would be about $175,000, roughly $4,960 short of the $180,000 he needs to pay off the house.
He’d have to cover that gap from savings or take a bit more out of the 401(k). The overpayment generally comes back as a tax refund, but not until he files his return the following spring.
If you’d rather free up cash in a different way, there are other ways to get rid of a required house payment.
If you’re 62 or older, a reverse mortgage lets eligible homeowners convert part of their home equity into funds — while keeping ownership of their home — with no required monthly mortgage payment.* See how a reverse mortgage works and whether you qualify.
*A reverse mortgage still requires borrowers to pay property taxes, homeowners insurance and home maintenance. The loan must be repaid when the home is sold or the last borrower leaves the home.
3. Medicare looks back two years
Social Security sets your Medicare premium surcharge using the most recent federal tax return the IRS provides, generally from two years earlier. (5)
Tom and Jan’s withdrawal year would show income of about $258,800. Using 2026 figures, that’s above the $218,000 joint threshold, which would raise each spouse’s Part B premium from $202.90 to $284.10 a month. (3)
That’s $81.20 a month each, or about $1,950 a year for the two of them. And it would hit two years later, just as they’re settling in on Medicare.
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4. After 65, it can cost you the new senior deduction
Starting in 2025, people 65 and older can claim an extra $6,000 deduction, but it phases out above $150,000 of modified adjusted gross income for joint filers. (6)
Tom and Jan will still be 64 in their withdrawal year, so it doesn’t apply to them yet. But if you’re 65 or older and planning a big withdrawal, a single high-income year could shrink or erase that break. It runs only through 2028. (6)
5. Spreading it out is cheaper, and the 3.25% loan is a bargain
Now try a different plan. Instead of one withdrawal, Tom takes about $67,800 a year for three years and nets $60,000 each time for extra mortgage payments.
Using the same assumptions, the federal tax is about $7,800 a year, or about $23,400 in all. (2) That’s roughly $15,400 less than the lump sum. Their income would also stay well under the Medicare surcharge threshold. (3)
Yes, they’d pay some interest while the balance comes down. At 3.25% on a shrinking balance, I estimate that’s under $12,000 over three years, less than the tax they’d save.
And remember what that loan is worth. Tom locked in 3.25%. Today’s average 30-year rate is 7.28%. (4) Cheap debt is the last debt to rush to pay off.
The other way to make the payment painless is to free up cash elsewhere.
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Another thing to consider: This is exactly the kind of decision where an hour with a professional can pay for itself.
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My honest take
I’m not against a paid-off house. There’s real peace of mind in owning your home outright, and I understand why Tom wants it.
But in this example, a single check to the bank would cost about $38,800 in federal tax and could raise their Medicare premiums too. Paying it down over a few years gets Tom to the same place for a lot less.
The goal isn’t to be debt-free on your first day of retirement. It’s to still have money on your last.
Sources: 1. IRS; 2. IRS; 3. Centers for Medicare & Medicaid Services; 4. Freddie Mac; 5. Social Security Administration; 6. IRS
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