Q. We have a home worth approximately $500,000 with a mortgage of $325,000. We have $115,000 in a 457 Plan account -- a tax- advantaged retirement account for public sector employees that is virtually identical to a 401(k) account in the private sector -- from a previous employer, $100,000 in the bank and we're expecting an insurance settlement of $150,000. We are planning to retire in a couple of years, and will be getting retirement income that is within 85 percent of our current income.

Would it be to our advantage to pay off the mortgage with these assets, or will the taxes on the 457 Plan make this cost- prohibitive?

A. You'll get slammed if you cash in your 457 account to pay off your home mortgage. You would lose about 25 percent in federal taxes, plus around 9 percent in state taxes. The taxes you would pay would be worth several years of mortgage interest payments.

Rather than pay off your home entirely, take your insurance settlement and a big chunk of your cash to pay down the mortgage. You could easily reduce your mortgage balance from $325,000 to $100,000 without tapping your 457.

Once you've paid down the balance, ask your mortgage company to re-amortize your mortgage in order to reduce your payments. If they won't recalculate your payments, simply refinance into a new loan to lock in a low, manageable payment.

Scott Hanson, CFP, is a senior adviser with Hanson McClain. E- mail questions to questions@moneymatters.com

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