Information on Converting 401K into an IRA to Pay Debt - The Bills.com Blog

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Information on Converting 401K into an IRA to Pay Debt

Friday, May 16, 2008

Question: I have private student loans for about 85K. I have about 45K sitting in my 401K. Can I convert the 401K into an IRA and use it to pay off the student loan without the additional penalty?

Answer: This may not provide the best benefit for you. You must convert the 401k to a traditional IRA, then to a Roth IRA in order to draw on the account. However, when your funds are converted from the traditional IRA to the Roth IRA, you must pay taxes on them. The amount taxed will be dependent on what tax bracket you are in. There is a good chance that the amount left over will only cover about 30% of the
student loan balance due. Moreover, you are eliminating the 401k, which probably took you more than 5 years to accumulate. Depending on where you are in the retirement stage, the $45,000 401K could be worth exponentially more when you retire
even if you added no money moving forward. If you have other means or options for paying back the student loan, I would suggest exhausting those first.

I hope the information provided helps you Find. Learn. Save.

Best,
Bill
www.bills.com/blog/

Also, make sure to get a free financial health check-up with Bills IQ!

User Comments

1. Posted by Christy on Thursday 29th October 2009 17:01

Hello: I have private student loans totaling 85k w. a variable interest rate & 72k in federal student loans. I am having difficulty paying back these loans. I am especially concerned about the private loans, as the interest rate can jump. I want to consolidate, but my credit is average. In addition, my private student loan lender does not offer consolidation at this time. I need to find an extended repayment/fixed interest rate consolidation plan, but am having trouble. With an average credit rating & no co-signer available can you suggest any options? I do not want to go into default, but I fear that I might if I cannot find a better option. I have asked my lender to work with me, but they've not been helpful. I freelance in film/tv bringing in approx 4-8k before tax. Thank you, Christy

2. Posted by Bill on Thursday 29th October 2009 17:57

Look at the Income-Based Repayment (IBR) to see if you qualify. The U.S. Department of Education has a clear Web page Facing Loan Default, which details the steps it may take to recover an outstanding balance on a federal student loan. The Student Loan Borrower Assistance Project offers a Web page outlining the steps in private student loan collection.

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