I recently took this question from a listener to “Money Matters,” my Sunday morning radio show:
“Wes, this is Betty. I’m 54 and thinking about retirement in the next five to seven years. But in helping my daughter get through college, I now have $125,000 in Parent Plus loans I have to pay off. Should I pull money out of my 401k to pay down some of the debt?”
I love doing the radio program. It allows me to answer individual questions and share larger lessons that arise from those calls. Betty’s quandary got me thinking about some of the biggest and most common financial mistakes we make — and how to avoid them.
Let’s get back to Betty…
1. Using 401k/IRA Money to Pay Off a Student Loan
This is almost never a good idea, even if you are 59 ½ or older when there is no longer a penalty to use retirement funds.
Betty is 54, so dipping into her 401k would require either taking a loan against her account or making on outright withdrawal. Paying back a loan to get her 401k back to even would seriously reduce what she ends up saving for her retirement and/or delay the time when she can stop working.
If Betty opts to simply withdraw the money, she faces the same savings deficit plus a higher tax rate for this year, as the disbursed funds would add to her overall income. Oh, and she’ll also pay a 10 percent withdrawal penalty on top of those taxes.
Remember: There are plenty of lenders who will finance college costs, but none that will lend you money to retire.
Betty should insist her daughter contribute to repaying these loans. A student loan finance company, such as SoFi, can potentially offer a significantly lower interest rate on that debt.