Hello:

I am 56 yo, and have 401K and IRA assets totalling around 240K.

I have student loan debt of 100K from my own and my children's education. The debt weighs heavily both financially and emotionally.

I understand that financial professionals almost always say to never incur penalties and taxes through an early withdrawal. However, I am wondering if in this case, I might be better off taking an early withdrawal and paying off the loans, with the understanding that I would be liable for taxes and penalties.

Any thoughts on this? Any suggestions on how to perform a cost/benefit analysis on this issue? For example, would the taxes/penalties when I borrow be less than the interest expenses I would incur on the life of the loan - not to mention the stress of having the loans very far into the future.

Thanks.

Private9:

Have received your email. Here is the short answer:

You COULD have withdrawn money from your IRA with NO Early Withdrawal Penalty if the money had been use to pay directly for the education for both yourself or your children. However, since you took out student loans, you CANNOT withdraw the money without incurring the 10% Early Withdrawal Penalty plus pay state and local taxes.

Unless you make a large annual income (over $105,000 for Married Filing Jointly), the interest on the student loans is tax-deductible up to $2,500. The benefit begins to phase out when your Married Filing Jointly Adjusted Gross Income hits $105,000 and goes away completely when you hit $135,000. Note that these are 2006 figures; 2007 figures will be somewhat higher.

For a detailed analysis of your circumstance, I need you to email me:
- Your marital status.
- Your projected adjusted gross income.
- Your other significant financial details (mortgage payment, charitable donations, real estate taxes, etc.).
- The state you live in.

The key here is the interest rate on the loans and its tax deductibility. Most likely, if they are govt sponsored loans, the interest rate is low. And they may also be tax deductible. So lets suppose that the interest rate is an effective 5% including tax deductibility. That means that as loing as your retirement investments are earning 5% or more, then you are ahead of the game and withdrawing the retirement money, especially with penalties makes no sense.

Agree with Scott in general, but more analysis is needed.