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Taxes and 401K
I have a 401K with a balance of $100,000 that I've designated to pay off my son's college education debts. I have other investments and a fixed annuity for my own retirement. I owe $74,000 to Sallie Mae in PLUS education loans. I want to cash in the 401k and use the funds to pay off the Sallie Mae loan. What are your thoughts?
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First, depending on your age (under 59-1/2, I assume), you will probably find that the $100,000 in your 401(k) will yield less than $74,000 after penalties for early withdrawal and taxes. Remember, whatever you take out of the 401(k) gets taxed as regular income, so this may push you into a higher tax bracket for both federal and state taxes. So your $100K gets reduced first to $90K because of the early withdrawal, and then the feds take, say 33% of the gross, and depending on your state perhaps they get another 5%, leaving you about half.
You say you have other investments -- why not use those to pay off the loans? |
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Taking out the full 100K in one year could push you up into a higher tax bracket than taking the funds out over several years. Your tax bracket will depend on your income from all sources. You need to do some projections / modeling to determine how much your tax would increase under various scenarios.
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I would find another method of paying off Sallie Mae if it were me. While it true there is no 10 % penalty imposed by IRS orState since your'e over 59 1/2 but just to be taxed as ordinary income on the cash out seems to me to be just too high a penalty. Why not go back to work, put all you net against the Sallie Mae loan? Or use another investment to pay off the loan. If you do use other investments, run the numbers on the interest being earned on the investments you might surrender vs the interest being charged on the Sallie Mae loan.
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