To start, my student loan payment – while a lot – isn't stretching me too thin at the moment. That said, I get metaphorical hives and question my choices when I see how much in interest I will need to pay over the life of my student loans.
Currently, there is enough in my 401(k) to pay off my loans, and still have a decent 401(k) balance. I'm also still working – somewhat young and still contributing to that over the next 20+ years – but at the end of the day, the math is still well in-favor of NOT cashing out the 401(k) and continue to hammer the loan payments on my own.
I know that specific question gets posted here a lot. I'm not asking that. What I AM asking is the enumerated situations where it would be a good idea to liquidate some of the 401(k) and pay down the loans. If I had literal millions in my 401(k) and wouldn't need to blink about the taxable income I'd have to pay, as well as the amount I'd be losing in compounding growth, I would think that ridding myself of the student loan debt would make sense.
Are there any more situations where it would be advisable? Just trying to determine if I am missing anything.
Cashing in 401(k) To Pay Off Student Loan…Always a Bad Idea?
byu/The_Code_Hero inStudentLoans
Posted by The_Code_Hero
10 Comments
No, it’s never a good idea to take an early 401k withdrawal to repay a student loan. There’s no situation where it makes sense to before retirement age.
No. Absolutely do not cash out your 401k. There is never a scenario where this makes sense.
Not only are the penalties for cash out steep (10% penalty in addition to treating a distribution as taxable income), you lose the benefit of compounding on the money you contributed (and you can never get back those years you lost).
This question has been asked before on this sub, and I and others have worked out the math. You can search some old posts and see it for yourself. That said, even if you had 13% interest rates or above, there’s no scenario where cashing out your 401k makes sense. Don’t do it. Just buckle down and pay off the loans.
Don’t rob your future self.
Look into a 401K loan if you are desperate. Much preferred over cashing out.
To answer your question directly, yes it’s always a bad idea
Taking money out of your 401k is a slippery slope and you’ll find yourself doing the same thing for a down payment, new car, etc… treat that money as sacred
Post balances and rates for more detailed answers… but the unanimous answer is still bad idea.
We need more info, what is your loans balance, income, 401k balance etc?
10% upfront and another 10% if you do not replace the draw, very expensive money. Some plans have a take a loan out based on your 401k which means you would just be paying yourself back
It’s a bad idea, and especially if you are not stretched thin by your payment.
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Never a bad idea to pay your debts