Can I use my 401(k) to pay off student loans? What to know before withdrawing
Many student loan borrowers find themselves on the horns of a dilemma: Your employer offers a 401(k) match, which is part of your compensation, but you also have to pay off student loans.How much should you allocate to each?After a few years of great stock returns, your 401(k) might look a lot better than your student loan balance.
It’s tempting in this situation to raid your retirement savings in order to get out from under a burden of debt.But is that a wise idea?Fortunately, student loan borrowers have options.The Setting Every Community Up for Retirement Enhancement Act of 2022 (SECURE 2.0) was a major piece of legislation passed during the Biden administration that contained over 90 provisions designed to make saving for retirement easier, more accessible and flexible.
One of them is the 401(k) student loan match. With this law, your employer can match your qualified student loan payments with a contribution directly into your retirement account, helping you pay down debt without missing out on your employer’s retirement match.Unfortunately, according to the PSCA, a national non-profit trade association that supports employers who provide employer-sponsored retirement plans, uptake on this program has been slow.As of the end of 2024, only 1.9% of 401(k) plans had implemented a student loan match.Larger plans were more likely to offer the match: 5.7% of plans with 1,000 or more participants had a student loan match. If your 401(k) balance has been growing faster than your student loan balance has been shrinking, you may be tempted to withdraw money from your retirement account to pay down your debt.Before you raid the future for the sake of the present, know that taking money out of your 401(k) is difficult for a reason.Withdrawing from your 401(k) before you’re 59.5 years old can trigger a 10% penalty fee.
Plus, you’ll likely have to pay ordinary income taxes on the distribution, as well as state taxes if you’re subject to them.“It’s honestly...