Yes it can be done - per the IRS (https://www.irs.gov/taxtopics/tc557). Although, depending on the amount of loans you are looking to pay (few thousand you mentioned), I would recommend you leave the retirement savings alone and work to pay off the student loans over time.
It is possible to use a 401(k) loan to pay off credit card debt. Most 401(k) plans allow participants to borrow a portion of their account balance, and the loans are then repaid with interest over a set period.
Yes, an early-distribution penalty will apply when using an IRA to pay student loans . You must pay the 10% additional tax on the portion of your IRAs you withdrew to pay student loans. An exception to the penalty applies to IRA distributions used to pay for current educational expenses. Was this topic helpful?
Money in an IRA can be withdrawn early to pay for tuition and other qualified higher education expenses for you, your spouse, children, or grandchildren—without penalty. To avoid paying a 10% early withdrawal penalty, the IRS requires proof that the student is attending an eligible institution.
You can take distributions from your IRA (including your SEP-IRA or SIMPLE-IRA) at any time. There is no need to show a hardship to take a distribution. However, your distribution will be includible in your taxable income and it may be subject to a 10% additional tax if you're under age 59 1/2.
While a hardship withdrawal won't be an option if you are looking to pay off your student loans, it could be worth considering if you are planning on attending graduate school or are assisting a family member with their college education. To qualify for a hardship withdrawal, you must meet certain criteria.
Both traditional and Roth IRAs allow you to withdraw money for qualified higher education expenses before age 59.5 without incurring the 10 percent early withdrawal penalty.
You may deduct the lesser of $2,500 or the amount of interest you actually paid during the year. The deduction is gradually reduced and eventually eliminated by phaseout when your modified adjusted gross income (MAGI) amount reaches the annual limit for your filing status.
Here's why:
But if you were to invest it, the only way that would help you pay off your debt faster is if you earn more from investing than you'd pay in interest. So your returns — after taxes are taken out — would have to be higher than your interest rate.
You may lose out on potential earnings if you use retirement savings to pay off debt. If you withdraw that $20,000 to pay off debt, you're also eliminating the opportunity to grow those funds over the long-term—otherwise known as compounding interest. “Weigh all the impacts,” Poorman says.
For example, some 401(k) plans may allow a hardship distribution to pay for your, your spouse's, your dependents' or your primary plan beneficiary's: medical expenses, funeral expenses, or. tuition and related educational expenses.
Eliminating debt can bring immediate financial relief, but dipping into your 401(k) or IRA to do so can jeopardize your future financial security. While the idea of becoming debt-free might be appealing, tapping your 401(k) or IRA is generally a bad idea.
Are student loans forgiven when you retire? No, the federal government doesn't forgive student loans at age 50, 65, or when borrowers retire and start drawing Social Security benefits. So, for example, you'll still owe Parent PLUS Loans, FFEL Loans, and Direct Loans after you retire.
Cons: Hardship withdrawals from 401(k) accounts are generally taxed as ordinary income. Also, a 10% early withdrawal penalty applies on withdrawals before age 59½, unless you meet one of the IRS exceptions.
Although there is no strict definition for high-interest debt, many experts classify it as anything above the average interest rates for mortgages and student loans. These typically range between 2% and 7%, meaning that interest rates of 8% and above are considered high.
To claim the American opportunity credit complete Form 8863 and submit it with your Form 1040 or 1040-SR. Enter the nonrefundable part of the credit on Schedule 3 (Form 1040 or 1040-SR), line 3. Enter the refundable part of the credit on Form 1040 or 1040-SR, line 29.
Total up your interest - If you have multiple student loans or different providers, you might receive several Form 1098-Es. Add up the interest amounts from all forms to find out the total interest you paid during the year. Know the deduction limit - The maximum amount you can deduct is $2,500.
Dependent Income: If you are full-time student and a dependent, any money you earn won't be counted in your household's income to determine rent. Any loans you receive also won't be counted as income if the borrower or co-borrower is a member of the household.
Can You Use a 401(k) to Pay Off Student Loans Without Penalty? No, you will pay a penalty if you withdraw money from your 401(k)—unless you're 59½ or older. Early withdrawals—that is, before you're 59½—come with a 10% penalty, in addition to the typical income tax on withdrawals from traditional (non-Roth) accounts.
Retirement funds may help your pay for college expenses. You can withdraw funds from your IRA without penalty to pay qualified higher education expenses. You can also borrow from your 401(k).
You can avoid an early withdrawal penalty if you use the funds to pay unreimbursed medical expenses that are more than 7.5% of your adjusted gross income (AGI). New parents can now withdraw up to $5,000 from a retirement account to pay for birth and/or adoption expenses penalty-free.
Deferring Social Security payments, rolling over old 401(k)s, setting up IRAs to avoid the mandatory 20% federal income tax, and keeping your capital gains taxes low are among the best strategies for reducing taxes on your 401(k) withdrawal.
Key Takeaways
Early IRA withdrawals—before age 59½—used to pay for student loans are subject to a 10% penalty on top of any income taxes owed. Early withdrawals from a Roth IRA, however, may be free from penalties as long as contributions—and not gains—are taken out before you reach age 59½.