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I have an opportunity to cash out my retirement. I have a student loan owing approx $180,000 for medical education. This loan acquires interest daily and I have been unable to get from under this loan. I have been paying on the loan for 14 years and have 7 more years to pay 1744 per month. I am 47 years old. I have 2 retirements and a 401 k. Not a lot of cash but getting rid of a $2000 a month student loan seems awfully appealing.

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  • No doubt this is a tough situation. I don't have enough for a full answer but I will say this: you'll probably pay a heavy penalty on the money you pull from your retirement accounts, and you won't be able to make up for lost time by contributing for past years, so you will be irreversibly sacrificing a lot of tax-advantaged money to do this. Also you may want to say what your interest rate is.
    – briantist
    Jun 10 '15 at 18:31
  • What is the interest rate of the loan? How much do you have in all of your retirement accounts? What is your income? Jun 10 '15 at 18:32
  • Interest rate is 6.5%. Retirement accounts have approx 750,000. I did the mental calculations and paying off 2,000 a month now and being able to save that money seemed like a good idea. Have no debt and finally actually live on my salary.
    – user29558
    Jun 10 '15 at 20:34
  • I had another question. One of my retirements states I am eligible to start drawing now. What is the draw back to life time annuity vs 20 year vs 1 time withdrawal. It seems like I would be able to pull more if I live longer and start younger.
    – user29558
    Jun 10 '15 at 20:35
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This is typically not a good idea and to display such I will assume that your income is right around 250K/year.

You probably can't take money out of your 401K, but you could take out 50K in form of the a loan. But lets say that you have enough in the other two retirements. Once you take it out you will be hit with a huge tax bill. This will easily bump you up into the highest rate, and you will also lose some of your itemized deductions. Assume the effective rate will be between 32 and 35%. You will also have to pay a 10% penalty.

How would you like to pay ~45% interest on a 180K loan? In other words it will cost you 260K to pay off 180K worth of loans.

A bigger question is what does the rest of your life look like? Are you leasing two new cars and have an 800K house payment?

I personally know someone, with a similar income to the one mentioned, that paid off 175K in 13 months. They did not eat out, one of their cars were a clunker, the other was nice but still modest, they did not vacation, and they did not contribute to their 401Ks other then up to the match. They also have a pretty modest home for their income.

Is it worth 13-18 months of your life to keep your retirement, avoid a $75K tax bill, and gain back 2K of disposable income per month?

You can do it, you just have to avoid living the doctor lifestyle.

BTW, it is typically not a good idea to take a 401K loan either.

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  • I don't have the typical doctor lifestyle. I have been paying loans for years. I don't own a house but I do have a car payment. I have a child in public school who is 5. I have 7 more years. I want to make more but I want to raise my son....I really do appreciate why it is a bad idea.
    – user29558
    Jun 10 '15 at 20:30
  • Good for you for not living the typical DR lifestyle. Good for you for wanting to change things. I might be shot for this, but I would recommend: The Total Money Makeover. It can be had for cheap on Amazon or Half.com
    – Pete B.
    Jun 11 '15 at 14:35

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