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Should You Pull Money from Retirement to Pay off Student Debt?


In 2013, my husband left a construction job he had been at for nearly 10 years. The company was an ESOP (employee owned) and they asked if he wanted to cash out his stock or if he would be rolling it to retirement.

Keep in mind, I had just bought that stupid brand-new SUV less than 6 months earlier after spending 3 years working to become debt free. I was 4 weeks away from my due date with baby #2 and we had no cash saved. My husband was starting his own company and we really weren’t sure he’d make enough to survive (Yup, we were awesome at bad decisions).

It begged the question, ‘Should you pull money from retirement to pay off student debt (or any debt)?’

I researched and discovered the following:

1) It’s going to cost you your tax rate plus, if you are under 59 ½, a penalty. On the low end, you are looking at a 25% hit (unless it’s a ROTH and that’s a whole different mess). As Dave Ramsey likes to say, “Would you borrow money at 25% interest to pay off debt?” That’s stupid.

2) Recovering from cashing out your retirement will be difficult. This article from Fidelity explains the long term ramifications of an early withdrawal: https://www.fidelity.com/viewpoints/retirement/cashing-out

But here’s the biggie…

3) It’s a short-term solution that won’t cause long term change. Math above aside, the more important factor here is that you need to make a permanent lifestyle change. Anytime you need money, it will be difficult not to look at that retirement account again. Anytime you need something big, signing a loan will be easy and I had pushed the ‘easy’ button repeatedly.

We sat on it for a while (OK, a really long time) before reluctantly rolling it to a retirement account. Here’s the shocking part, my husband was the first one leaving the company to roll the money to retirement. All the others paid taxes and penalties and cashed out.

Holy Moly!

We spent YEARS paying off our student loans and that stupid SUV. Those years were a painful lesson about bad decisions. Every month I wrote a check to Sallie Mae and B of A, I hated them a little more. By the end, I was so fed up paying, I couldn’t imagine ever borrowing again.

Last year, we earned over 20% on the money we were so close to cashing out. As I watch that little nest egg grow, I am relieved I didn’t take the shortcut.

Don’t cash out. Just. Don’t.

Oh but wait… the government will save you!

Just kidding.

Rand Paul thinks the penalty should be removed so you can use your retirement to pay student loans. Sounds like a good idea right?? This was an interesting article explaining why that isn’t a great idea either: https://www.forbes.com/sites/wesleywhistle/2019/12/05/rand-pauls-solution-for-student-debt-rob-peter-to-pay-paul/#4e1253827b9b

Disagree with me? Let me know! I’d love to hear your view.


  • Reply Jennifer |

    So what is public opinion about a loan from your 401k? Ours works that the interest charged goes back into your account. There are no loan fees. Obviously taking the loan affects the compounding potential of that money while it is being loaned. While the market was sucking so bad several years ago we did this now with our 401k growing like we have never seen I hesitate doing this

    • Reply JP |

      I wouldnt. If for some reason you leave your job the entire loan is due. You might not have the cash to pay it back should something unexpected come along. Plus it just sets up a bad habit.

So, what do you think ?