Pay student loans with retirement savings?

Dear Debt Adviser,
I’m 37 years old, married with three kids, and I have about $15,000 in college debt from my MBA expenses. Should I withdraw retirement savings from my 401(k) or Roth individual retirement account to pay off the debt? I’m sick of having this debt and want to be done with it now. Can I avoid penalties if the retirement money is used to pay off student loans?
— Randy

Dear Randy,
With three kids, I would have expected you to have developed more patience by now. Still, 37 is young in the scheme of things. Here’s some advice from someone who has been patience-challenged for decades longer than you and comes from a family whose patriarch thought impatience was the most beautiful flower.

I have a three-part answer to your question.

• Yes, generally speaking, you can withdraw money from your IRA to pay higher education expenses without penalty.
• You cannot, however, withdraw funds from your 401(k) without paying the 10 percent early-withdrawal penalty.
• I don’t believe you should withdraw the money from your retirement accounts.

You are responsible for a spouse and three children. Though it may be argued that she is equally responsible for you and the kids, we are talking about you — and you are most certainly on the hook.

In my experience as a father and husband, I can tell you there is a very good chance in the next five to 10 years the $15,000 you are considering withdrawing may be needed for something more important than retiring an education debt you are “sick of having.” Life has a way of sending the unexpected our way at the least convenient time, and often the unanticipated event(s) comes with a high price tag attached. It is hoped you have an emergency savings account of six to 12 months’ of living expenses put aside to help fund life’s financial curveballs, but you may find additional funds are required.

Also, the $15,000 you remove from retirement funds now could, if left where it is, be worth in the neighborhood of $80,000 by the time you’re 67. Even when you take into consideration inflation, you could be missing out on the equivalent of $40,000 if you remove the $15,000 now. As an MBA, you’ll no doubt appreciate the time value of money.

Let me suggest that a better idea may be to develop a plan to pay down your college debt more quickly.

Let’s do some math. If we assume you have another 10 years to pay on your loan and your interest rate is 6 percent, your monthly payment is approximately $167 per month. If you were to add an additional $500 to each payment, for a total of $667 each month, your debt would be paid off in two short years. To pay off the debt in one year, you would need to boost your monthly payment by $1,125.

Whether you pay off your student loans sooner or later, my guess is once you know this debt is heading for the door, you won’t feel the need to incur a penalty to send it on its way immediately.

Should you decide to withdraw retirement savings from your IRA, I would recommend you consult with a tax-planning professional to assure that you follow all the proper procedures. You do not want to complicate an already bad financial move with a problem with the Internal Revenue Service.

Good luck!

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