Taking money out of your 401(k) and paying regular federal income tax, a 10% early distribution penalty and (probably, depending on your state) regular state income tax, makes this a very expensive way to pay off your mortgage.

I would go the other route, of decreasing my contributions to the existing 401(k)s and using the extra money in the paycheck to pay down the principle faster. This does require a bit more discipline than the other way.

Adding $170k to your regular $125k would also phase out many credits -- not sure which ones you might be eligible for -- as well as substantially phasing down your itemized deductions. Depending on the rest of your return, you might find yourself in an Alternative Minimum Tax (AMT) situation, too. Your nominal tax bracket would go up, probably to 25 or 28%. You would get all the pain over with in one year, but what pain it would be!

From personal experience, it didn't work for me to use my 401k to pay down debt. Along with all the excellent points Reader makes, it takes far more discipline to replenish a 401k than it does to pay down debt using other methods. Life has a way of derailing the best of plans. I'd advise keeping the 401k and looking for other methods to pay down the mortgage.

The reason that I was assuming the "pain" would be worthwhile is because of my current age (30). This gives me time to replenish and after my mortgage is completely paid off "superfund" my 401k. Also the catch up contribution would be available after age 50 I beleive. This could offer some tax relief later on? I am no expert and this is why I am asking these questions. Thank You for your response.

I would continue to contribute the same 15% of my income that I always have to my 401k.

I'd stop contributing to the 401k, with the exception of getting an employer match.

What's your mortgage rate? Although not guaranteed, you're 401k balance may outperform that rate invested in the market long term against any interest savings you may see.

I'm with Reader, the potential tax hit and penalties will eat up a large portion of your 401k balance. I believe you'd do better to cut your expenses and expenditures to the bare minimum. Live like you're living on half your income, and make a 5 or 10 year plan to pay off your mortgage, instead of pulling out your 401k, assuming you even can.

Paying off a mortgage early is not exactly a hardship event like a pending foreclosure would be. Your 401k plan may not let you make a withdrawal to pay off a mortgage, and probably has limits to borrowing against it.

My perspective is probably slightly different because I am debt free, and my mortgage is paid in full. There is a huge freedom to not having a mortgage payment. However, there is also the tied to the property feeling. There is no way I can go live somewhere else because I couldn't get enough out of my property to make that a worthwhile (and debt free) transition.

My biggest concern - if I were you, would be to look at how long you intend to live in that house.; You will be paying approximately $200K more than your actual mortgage in interest if you hold the loan for a typical life of the loan. Its in your loan documents, go take a look at it. By law it has to tell you how much you will be paying over the life of the loan in interest if you hold it full term, typically - that is 2 times the face value of the loan (minimum).

What I would suggest to you is to take your 401k to an actual tax accountant and explain what you are wanting to do. Ask them specifically how much you will be paying in fees and taxes to pull that out of your 401K early. If you actually do hit a minimum tax penalty for that dual hit from yours and your wifes withdrawal, then find out what that threshhold is for you and see if it is possible to do the one withdrawal this year, and then the second withdrawal the next year.

Someone who can actually look at the numbers and crunch your income and your loan, and 401K terms is in a much better position to give you the guidelines on this. Common sense will show you how much you will save as far as your interest goes, and yes - you definitely will be able to chunk away at the 401K. In addition, I have no idea what your 401K is paying right now, but there isn't much happening in the market that they are paying big bucks for. I would almost bet that your house payment is more than the average savings account interest being paid at the moment. At least if you are in any kind of secure 401K savings account, it will be.

Those are the questions I would look at. If I were planning to live in this house for more than 7 years, I would pay it off and try to find the most cost effective way of doing it, in the fastest way possible.

http://www.bankrate.com/calculators/mortgages/amor tization-calculator.aspx

Play with the amortization calculator for fun...if your base rate was $225K, and you're at 4.5% interest, and suppose you got the loan 5 years ago...you would be paying $185K in interest. Calculate that pentalty and extra taxes, and see if it is going to cost you more than you are saving. Like I said, take it to a tax accountant and find the real numbers you are talking about.

Cashing out a 401k should be the action of last resort. You asked if you would have to pay state income tax on the widthdrawl and the answer is yes for the majority of the states. You can check for your specific state since you did not provide it here. I don't understand why you think taking a penalty of $8,500 for your account and another $8,500 for your wife's account would be a "good" thing financially. You were smart enough to put money away and bravo to you for the high percentage that you are saving. However, no one knows what the future holds and you cannot guarentee that you will continue to earn at that same salary or that either of you will keep you job. Unexpected things happen all the time in life. I have personally been laid off when I least expected it. You can have all the great plans and intentions in the world but the reality is you may not be able to keep them. If paying off your house is something you really desire then there are other ways to achieve it. You can look to where you can cut some expenses and pay extra money to the mortgage. You could also decrease your contributions to your 401k by 5% and put that extra amount towards your mortgage. There are other options including extra jobs (consulting or work at home) that could provide you an alternative. You are already doing many things that are smart financially don't start making mistakes now by cashing out your 401k.

There is a lot of good advise here, I would stay away from using the 401k to pay off the mortgage,the penaltys just don't make it a viable option.
If you are not struggling to pay your mortgage as it is , then why pay more money than you need to towards paying of the mortgage(releasing funds from 401k), what your suggesting is not as cost effective as it seems.
Cashing in a proportion of your 401k will only seek to decrease the gains you have already accrued.
Going forward I would pay less into the 401k and more into the mortgage if you want to reduce the outstanding $225k.
Long term the family wealth you have when it comes to retirement age may be more comfortable.