Regardless of the length of time it will take for your tax penalty to be repaid, taking out money from your 401(k) won't make sense. With federal student loan debt, your interest rate will never rise above your fixed rate.
You may qualify for temporary reprieves from payments or a less expensive payment plan if you struggle financially in the future.
However, you may be able to withdraw money for early retirement in such cases as a layoff.
Based on a comparison of tax penalty and interest rate this could be a good idea.
However, you are also $45,000 short in your retirement account from what you had before.
Debt may be considered an eligible hardship case if it is allowed by your plan.
Tax Penalties for Withdrawing Money Early If you withdraw from your retirement account early, you'll have to pay ordinary income tax plus a 10% tax penalty.
All of the money your employer deposited into your account is ineligible for distribution for debt repayment, says IRS representative Clay Sanford.
You can't withdraw these funds because your employer contributed the money for the sole purpose of your retirement.
For instance, in 2010 if you're single and your taxable income is ,000, your marginal tax rate is 25%.
However, the additional ,000 in 401(k) distributions puts you into a higher tax bracket.
Alternative Methods to Reduce Debt There are numerous options to reduce debt and interest rates.
Here are just a few: The Bottom Line There's an emotional effect that kicks in when you begin to view your 401(k) as accessible money.
But before you drain your 401(k) account, you'll need to know if you are eligible, and if the cost in taxes and reduced funds at retirement will end up worth it.