$2.1 Trillion in Forgotten 401(k) Accounts Could Be the Key To Paying Off Your Mortgage

Imagine finding an old 401(k) with a balance of nearly $70,000—all while battling higher home insurance premiums, property taxes, and utility bills on top of your monthly mortgage payment.

That could be a reality for more Americans than they realize, according to a new study by Capitalize and the Center for Retirement Research at Boston College. Their study found that $2.1 trillion is sitting idle in 401(k) accounts with an average balance of $66,691, as savers lose track of these accounts because of job changes, rollovers, or lack of portability.

Their findings come at a time when 93% of homeowners say that housing costs are too high. Could these funds be the key to improving homeowners’ financial footing, or a risky temptation to raid retirement savings?

The temptation: Paying off the mortgage early

For many homeowners, the idea of wiping out their mortgage, even partly, is as emotionally appealing as it is financially strategic.

With refinancing off the table for most, a forgotten 401(k) can feel like a financial lifeline—a way to knock down debt without taking on a higher rate or disrupting your monthly budget. In fact, 80% of outstanding mortgage debt carries a sub-6% interest rate, according to a recent report from Realtor.com®, making traditional refinancing an increasingly unpopular move.

And then there’s the psychological pull: the security of owning your home outright. For many homeowners planning to age in place, a paid-off mortgage feels like the first step toward this long-term stability.

But as tempting as it may be to redirect an unexpected 410(k) windfall toward your house, experts caution that the emotional satisfaction of paying off your mortgage can come with hidden trade-offs—especially when it means cashing out retirement savings early.

The trade-off: Taxes, penalties, and lost compounding

In most cases, early withdrawals (before age 59.5) from a 401(k) come with a 10% penalty on top of regular income tax. That means if you pull out $60,000, you could easily lose $15,000 or more to taxes and penalties alone.

Even if you’re over the age threshold, the entire amount is still considered taxable income, which could leave you footing an unexpected bill.

“If they pull out $20,000 to pay down a mortgage, they now owe income tax on that,” explains Grant Meyer, certified financial planner with TruMix Advisors. “It could potentially push them into a higher tax bracket, and they could owe a bunch at tax time.”

From an investment standpoint, the math also often favors keeping the funds where they are: 70% of existing mortgage debt has a rate of 5% or lower, but historical 401(k) returns hover closer to 5% to 8% annually.

In other words, every dollar left in your retirement account has the potential to earn more than you’d save in mortgage interest over time. Pulling that money early doesn’t just reduce your balance but interrupts the powerful effect of compound growth.

For example, using a standard penalty calculator, I found that if I were to withdraw $60,000 from my 401(k), I’d lose out on nearly $490,000 in potential asset growth, assuming a 6% rate of return and 38 years until my retirement date.

Even considering home appreciation, you’re likely better off keeping that money in your 401(k), says Jay Zigmont, a certified financial planner and founder of Childfree Wealth.

“A diversified stock portfolio in your 401(k) is likely to grow at a faster rate than the appreciation in your home,” he says. 

To his point, "Over the last 22 years, home sale prices have increased on average 4.2% annually at the national level," says Realtor.com senior economic research analyst Hannah Jones. That's nearly 2 percentage points less than the average 401(k) growth.

And even if you plan to use the money "just this once," treating your retirement account like an ATM can be a slippery slope. Experts warn that dipping into long-term savings can undermine retirement security, especially for those who are already behind on their goals.

“The average American does not have enough saved for retirement,” Meyer says. “Pulling from retirement funds would only worsen that.”

In most cases, a 401(k) should be left to do what it was designed for: grow over time, untouched.

The smarter play: Consolidate and reinvest

Instead of raiding a forgotten 401(k), many experts say the better move is to roll it over and let it grow.

When you leave a job, your old 401(k) doesn’t follow you automatically. Unless you proactively transfer the funds, they can sit dormant for years—unmanaged, unmonitored, and often invested in low-yield money market accounts. That can negate all of the advantages of keeping your money locked up in these accounts.

“Every little bit counts when saving for retirement,” says Meyer. “Consolidating old 401(k)s into your new workplace plan or an IRA can have a significant positive impact over time. This is especially true the younger you are.”

Combining old accounts can also make it easier to track your investments, lower your administrative fees, and avoid forgetting them altogether.

“The key is to have one account that you keep an eye on,” adds Zigmont. “I've spent months with clients trying to track down old 401(k)s, and in some cases, we couldn't find them.”

If your balance is below $7,000, you may soon get help automatically. A 2022 industry initiative led by major retirement-plan providers has launched a new auto-portability network, designed to automatically transfer small 401(k) accounts to a worker’s new retirement plan when they change jobs.

Still, for accounts above that threshold, or if you’ve changed jobs frequently, the burden falls on you to take action.

When it could make sense to use a 401(k) for housing

For most homeowners, draining a 401(k) to pay off a mortgage comes with more risk than reward. But in a few specific situations, experts say it might make sense—if it's part of a broader financial plan.

One scenario: older homeowners approaching retirement who already have robust savings and limited income needs. For them, the emotional and financial security of entering retirement debt-free could outweigh the lost investment gains.

“Using your 401(k) to pay down your mortgage should only be done if it is part of your overall retirement and tax plan,” says Zigmont. “Retiring with a paid-off house makes it much easier to make ends meet, but taking money from your 401(k) in one year could result in a significant tax hit.”

Another option is using a 401(k) loan, which allows you to borrow against your balance without paying early withdrawal penalties, says mortgage broker Carlos Scarpero. However, interest still applies and the money must be repaid on time, or it will be treated as a taxable distribution.

Meyer cautions that this strategy should be used sparingly for high-interest debt such as credit cards or personal loans only.

“However, I would never recommend a 401(k) loan to pay down a mortgage,” he says

There’s also a narrow exception for first-time homebuyers who roll over a forgotten 401(k) into an IRA. Under IRS rules, you can withdraw up to $10,000 penalty-free from an IRA for a home purchase—though you'll still owe taxes, and the rule applies only once.

In any case, advisors stress that these moves should be done with planning and intention, not as a knee-jerk reaction. Or, in other words, it’s less about finding free money and more about using found money wisely.