paying off loan with 401k


S

skye

Hi,

I have 10 more working years left and am currently unemployed due to a
layoff. the amount of money in my 401k equals the amount of money I owe on
my student loan (35k) which is in default. In fact, during the past year
worked, I had a 10% wage garnished imposed by the collector.

Given the interest on the loan and collectors fees, I am wondering if it is
advisable to cash in my 401k, and pay off the loan.

Advise is welcome.
skye
 
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J

John A. Weeks III

skye said:
I have 10 more working years left and am currently unemployed due to a
layoff. the amount of money in my 401k equals the amount of money I owe on
my student loan (35k) which is in default. In fact, during the past year
worked, I had a 10% wage garnished imposed by the collector.

Given the interest on the loan and collectors fees, I am wondering if it is
advisable to cash in my 401k, and pay off the loan.
401K money is for your retirement. If you cash it out now, you are
going to pay a whole bunch of fees, penalties, and extra taxes. The
net amount that you get back would be far less than your current
account balance. So, no, the account would not cover your student
loan.

In addition, what do you plan to use for money once you retire?
Granted, money isn't everything, but every food store I shop at
only accepts money when I try to purchase food. It is far better
that you eat beans & rice now, and tough this out, than have
nothing to eat in your old age.

You have to look at the bigger picture here, and fix the real
problem. If you are in the neighborhood of 55 years old (you
state you have 10 more years of work prior to retirement), and
you are still paying (or rather, not paying) your student loans,
then you have some other problem. Most likely, you are over
spending and not taking care of paying your bills on time. You
first need to cut your spending. That means moving to a cheaper
apartment, selling your car and buying something more reasonable,
and cutting off the cable TV and other luxuries. Next, once you
get back working, take your money and pay your living expenses
and bills first. It might take a few years, but you really have
no other choice, at least if you want to avoid eating Alpo when
you are 70 years old.

-john-
 
S

skye

John A. Weeks III said:
401K money is for your retirement. If you cash it out now, you are
going to pay a whole bunch of fees, penalties, and extra taxes. The
net amount that you get back would be far less than your current
account balance. So, no, the account would not cover your student
loan.
I am 55. Most of the loan could be paid off.
Social security benefits can be withheld if you owe money on a student loan.
Whatever course I take, my retirement money will be affected.
My question pertains to whether I can avoid the cost of carrying a
defaulted student loan (interest, collection fees) by paying it now with my
401k and having more income for saving with my next salary, and untouched
social security benefits.I
have at least 10 years to build another 401k. The other option is to leave
the loan, have my next income garnished, and hence live on a reduced income
....

Thank you, skye
 
B

BMS

Look into a 72t distribution.

skye said:
owe it

I am 55. Most of the loan could be paid off.
Social security benefits can be withheld if you owe money on a student loan.
Whatever course I take, my retirement money will be affected.
My question pertains to whether I can avoid the cost of carrying a
defaulted student loan (interest, collection fees) by paying it now with my
401k and having more income for saving with my next salary, and untouched
social security benefits.I
have at least 10 years to build another 401k. The other option is to leave
the loan, have my next income garnished, and hence live on a reduced income
...

Thank you, skye
 
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M

Mark Freeland

John A. Weeks III said:
skye said:
I have 10 more working years left and am currently unemployed due to a
layoff. the amount of money in my 401k equals the amount of money I owe
on my student loan (35k) which is in default. In fact, during the past year
worked, I had a 10% wage garnished imposed by the collector.

Given the interest on the loan and collectors fees, I am wondering if it is
advisable to cash in my 401k, and pay off the loan.
401K money is for your retirement. If you cash it out now, you are
going to pay a whole bunch of fees, penalties, and extra taxes.

[ Excellent advice on longer term cash management removed for brevity.]
Skye noted that he was 55. If he was laid off in the year he turned 55 (or
later, e.g. he could have turned 55 in October, and been laid off this
January), then the IRS does not assess a 10% penalty for early withdrawal.

While I agree fully with John's advice, we should still be as clear as
possible on the costs.
http://www.irs.gov/publications/p575/ar02.html#d0e3737 (Scroll down to
"Additional exceptions for qualified retirement plans".)
 

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