It’s a common goal for people to want to pay off their mortgage in an accelerated manner. This goal is usually based around two underlying rationales.

First, people want to save money by reducing the amount they’re paying in interest. If you have a $200,000, 15-year mortgage with a 5% interest rate, you’ll pay more than $80,000 in interest payments. By paying off the mortgage as quickly as possible, there is a quantifiable financial benefit you’ll earn.

The other reasoning we typically see is security. Carrying debt adds an element of uncertainty to your financial situation. The peace of mind you have when you’re debt-free is something that many people highly value. 

For those reasons, we’ll sometimes work with clients to accelerate how quickly they’re going to pay off their mortgage if they have liquid assets. One thing we tend to not recommend, however, is using using your 401(k) to pay off your mortgage.

Here’s why.

You’ll Be Hit with Taxes—and Maybe Fees, Too

Let’s go back to our previous example and imagine you have $200,000 to pay off on your home with a 5% interest rate. If the money in your 401(k) is tax-deferred, you’re going to be paying income taxes on every dollar you withdraw. If you’re in the 25% tax bracket, you’ll actually have to withdraw close to $270,000 just to net $200,000 that you need to pay off your mortgage, and that’s without accounting for state income taxes. Suddenly, saving $80,000 in interest payments looks a little less attractive.

Even worse, if you’re under age 59 ½ (or age 55 if you’re retired), you may be subject to a 10% early withdrawal penalty. Assuming a 25% income tax rate, you’d have to withdraw over $300,000 to net $200,000 after paying for taxes and fees—about $20,000 more than what you’d pay in interest payments during the life of your mortgage.

You Sacrifice Compounding Potential

Not only are you looking at a large, present day tax bill, you’re also significantly hindering the long-term potential growth you may be able to reap inside of your 401(k). Let’s imagine two people, Tim and Tom, who are each 45 and have $350,000 in a 401(k). Tim decides to withdraw $300,000 to pay off his mortgage, leaving him with $50,000. If he earns a hypothetical 7% annual rate of return, that $50,000 would grow to about $193,000 when he retires at age 65.

Tom, on the other hand, decides to keep that money in his 401(k). His $350,000 would grow to about $1.35 million when he retires at age 65, over $1 million more than what Tim would have.