You would also owe state income tax.
If you have a lump sum of income, you should make a lump sum payment of estimated taxes by the following deadline. You can pay electronically at www.irs.gov/payments. Don't forget to make an appropriate state estimated tax payment if you live in a state with an income tax.
| Lump sum income in |
estimated taxes due |
| Jan-March |
April 15 |
| April-May |
June 15 |
| June-Aug |
Sept 15
|
| Sept-Dec |
Jan 15
|
Then, you may need to use the "annualized" method of calculating a penalty to show that you owe no penalty because you paid the correct tax in each quarter. If you withdraw money gradually, you could have 22% or so withholding on the money by the custodian instead of making your own payments.
Check your state -- some states exempt a portion of retirement income from state taxes.
As a financial matter, be aware that paying off a 5% mortgage is the equivalent of earning 5% on your investment. (And in fact, if you completely pay off the mortgage and lose the ability to deduct mortgage interest, paying off a 5% mortgage will be closer to earning 4% on the investment.). If you can earn more than 4-5% in the 401k with the same risk as owning your home, you may want to stick with the larger earnings and use the earnings to pay off the mortgage. (A fixed rate mortgage becomes cheaper over time because of inflation, too.)
Also as a financial matter, investing more money in your home may reduce the diversification of your investments, which may be a consideration.
