Dear Debt Adviser: I’m 37, married with three kids and 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’d expect you to have developed more patience by now. Still, 37 is young in the scheme of things.
I have a three-part answer.
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.
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.
Steve Bucci is the author of “Credit Management Kit for Dummies.” Email debtadviser(at)bankrate.com. See more Debt Adviser columns at Bankrate.com.