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I've been considering paying off my mortgage with my 401k balance. Some particulars, I'm in WA state in the US, and I'll turn 60 in about a week.

I have enough in my 401k with my current employer to pay off the balance of my mortgage. Maybe not quite pay it all the way off, but well within a few thousand either way.

FWIW, I have other investments as well that total roughly $300k that are completely separate from my 401k funds.

My mortgage is currently at 2.75% on roughly $138k-ish balance (I don't have a pay-off amount from my mortgage company, so I'm just looking at the current balance). It's a 15 year fixed loan that matures in 2028. The house is currently worth somewhere between $450k & $500k.

My 401k YTD performance is 16.5%, and 1 year is 10.7%. on a balance (today) of $150k-ish and I'm currently putting 25% of my paycheck into 401k (with a 4% match from my employer).

I'm looking at retiring in about 5 years, sooner if possible.

My question is, given these variables, is it wise (or possible) to pay off my mortgage with my 401k, then bump my 401k up significantly so I hit the maximum contribution of (currently for >50 year olds), $25k / year. I'd also max out Roth IRA contributions for my wife & me as well as our HSA funds (which can also be invested if you don't use them) which are similarly tax exempt.

In my head this makes some sort of sense, but I'm not a financial person.

Is this (A) possible, (B) advisable, and (C) what pitfalls might there be (taxes, penalties, market instability, etc.)? I don't know how to do this calculation so I'm hoping I've provided enough information to get the help.

I will say, it is

(A) Possible

(B) No, as you are getting very cheap money at 2.75% on your mortgage and your 401K is giving you 10+% and even if it decline to average of 7% or less, you are still making a lot in long run. And if you withdraw funds from 401k, you will be paying taxes.

(C). As outlined in B, you will pay taxes on 401k withdrawal as those withdrawal will be in bulk and will raise your tax bracket for the year that you withdraw funds.

Besides the tax implications there is something else to consider.

By taking the money from your 401K, and then paying down the mortgage you are moving money from retirement accounts and locking it into home equity.

Don't get me wrong I believe that it can be an important part of retirement planning to be mortgage free by retirement. Others disagree but that isn't the point. You will be moving money that could be invested in stocks, bonds, small companies, large companies, and even international funds all while staying inside the retirement account. Now you will have 130K more money invested in your house, and 130K less in your flexible retirement accounts.

You will have limited options to access the funds in the house. You could sell, you could get a new loan, but those have costs and may even have tax impacts.

This also ignores the complications of taking money from a 401(k) while being employed. But so many people have multiple 401(k)s and IRA accounts it is very possible that others considering this option can use funds in old 401(k)s

This question has a number of variables, but the bulk of the question reduces to one discussion which we've had here a number of times. A guaranteed fixed rate vs a higher variable rate.

You have money (in the 401(k)) which isn't "earning 10%+" but rather, 10% with a standard deviation of 18% or so. It's an important distinction, because even if the 401(k) had a guaranteed 4% available, it would be silly to use money earning 4% to pay off a 2.75% debt.

Even though the numbers look favorable long term, there are anti-debt people who would say that they'd prefer to get their debt to zero regardless of its cost. And others who are ok with carrying a mortgage while working, but are advocates of having no mortgage at retirement. You seem to be on track to having the mortgage paid right when you plan to retire, so that's not the issue.

All that said, I'd suggest you be mindful of your tax bracket.

With a $24K standard deduction, I am betting that you are in the 22% bracket now, but will probably be in the 12% bracket during retirement. $100K pulled out today would have a tax nearly all at 22%, with perhaps some in the 24% bracket. Let's call it $22K.
At retirement time, if your highest bracket is 12%, that's a $12K total hit. You are proposing to throw away $10K.

If you see it as an opportunity to pull some money out of stocks, I'd just rebalance. Move a bit from whatever stock fund to a bond fund within the 401(k) acct. Part of the benefit of the tax deferred retirement acct is the ability to save off the top, at your highest bracket, i.e. marginal rate, but withdraw at the average, lower rate. Now isn't the time to mess that up.