I have approximately $23,000 in student loans coming due in February of 2010. Well that is when the grace period is over and I will need to start making payments. The monthly amout is going to be difficult to come up with every month along with all my other monthly expenses. I have a 401k from my previous employer that I am going to roll over into my current employers 401k account. I wanted to know what the tax implications and penalties would be for this kind of move. Does the IRS allow you to pull money as a hardship for student loans? Similar to the first time home buyer.

I am 45 and make $61,700 annually and my wife (39) brings in $18,300. We live in Las Vegas, NV. Am I in danger of bumping myself up to another tax bracket? Thank you in advance for your help.

Are these subsidized student loans? At what interest?

Even if you do qualify for a hardship withdrawal, that doesn't change the interest and penalties. You will still have 10% taken off the top (and I doubt if your student loans are charging that much). Not to mention the tax liability.

This is generally a bad idea and, for you, even worse. You are talking about paying a penalty for withdrawing funds to pay off loans that have tax deductible interest. No way!

Scott covered all pertinant issues rather well; I have nothing to add, other than my standard:

DO NOT DO IT!

Your taxable income does indeed increase by the amount of the withdrawal - assuming you are filing as married filing jointly you are in the 25% income tax bracket. Add the 10% early withdrawal penalty and that means Uncle Sam takes 35% of the distribution. So to pay off your $23K loan would require a withdrawal of about $35K from your 401(k). This means your total taxable income will be $61.3K + $18.7K + $35K = $115K, which is still in the 25% federal bracket.

Have you considered taking a loan from your 401(k) instead of a withdrawal? That way you eliminate the taxes and penalty, and the interest you pay goes into your account.

If you do decide to go through with the withdrawal - you should reconsider your plan of rolling your old account to your new employer's plan, as most plans do not allow in-service withdrawals. So check with your plan administrator to see whether you would be allowed to make a withdrawal after you roll the assets to the new plan. You may have to leave the account where it is with your old employer and take withdrawals from there.