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I am 29 years old with almost $100,000 in student loan debt, the majority of which is from my master’s degree. Most of my loans are federal, but I also have around $10,000 in private student loans. I’ve been consistently paying my loans since finishing grad school, but I feel like I will never pay down what I owe. I’ve also been taking advantage of the federal student loan forbearance due to COVID-19 to pay extra on the private loan.
My student loan debt is a huge source of stress and anxiety, and it impacts my ability to save for the future. Even with a comfortable salary, I live in an area with an extremely high cost of living, and I feel like I am still living paycheck to paycheck.
I have around $55,000 in my employer-sponsored 401(k), most of which is in a Roth 401(k). Since I still have 30-plus years to contribute toward my retirement savings, should I use these funds to pay toward my student loan debt? Is that even possible?
-A.
Dear A.,
It’s possible to use your 401(k) to pay off student loans. I wouldn’t recommend it, though, unless your only two choices are a 401(k) withdrawal versus defaulting, as I’ll explain shortly.
For starters, a $55,000 distribution wouldn’t translate to a $55,000 reduction in your debt. The rules for Roth 401(k) distributions are a tad complicated.
In a nutshell, any money your employer contributes actually goes into a separate pre-tax traditional 401(k). You’d owe income taxes and a 10% penalty on any withdrawals from employer-matched funds, since you’re younger than 59 ½.
Only your contributions, plus their earnings, go into an after-tax Roth account. If you take a distribution from your Roth 401(k), the IRS will pro-rate the amount you take out between your contributions and earnings. For example, suppose you took a $50,000 distribution. If your account consisted of 80% contributions and 20% earnings, you’d owe taxes plus a 10% penalty on $10,000, or 20% of…
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