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Asked 2/16/2009

401k/student Loans

Can I use my 401k to pay off a student loans wage garnishments ?

 
 
 
 
 
Answers

Answer 1/5 - Submitted 2/17/2009

If you are still employed by the sponsoring company, probably not.
The IRS does not consider student loan or the garnishment of wages a safe harbor Hardship.
That is usually the only option to withdraw from your 401(k) until you leave employment.
If you are no longer there, you can take the money to pay it off, but it will be subject to taxes and penalties.
Usually you can borrow against the 401-- 1/2 your balance up to $50,000-- but that will have to be paid back out of your paycheck. Call the administrator of your plan, they can let you know what is allowed and available through your specific plan. (each one is different)

 
 

Answer 2/5 - Submitted 12/18/2010

Yes. You will probably be penalized for an early withdrawl.

 
 

Answer 3/5 - Submitted 12/6/2011

You can use 401k to pay off anything almost but you will have to pay a substantial fee to rollover 401k or take any amount out early.

 
 

Answer 4/5 - Submitted 12/6/2011

The best way to go about this is to take a loan out on your 401k. This would then allow you to repay the amount without any penalties. The best part is that all of the interest you pay on the loan goes into your 401K account so you are paying yourself the interest. The disadvantage of this is that should you become unemployed or laid off you would then have to pay penalties and taxes on any amount that you have not repaid to your 401K plan. This can hit you at the worst time when you really can't afford it. A loan is still your best option if it is available to you from your employer. Check with your HR department and see if a loan is possible. Paying off the amount means that you will also have to work on getting rid of the wage garnishment and make sure that the group that is garnishing you is aware that you have paid off the loan and has communicated that with your company. I have seen people pay off loans and have the wage garnishment continue for a few months until the paperwork caught up with their employer.

 
 

Answer 5/5 - Submitted 12/7/2011

It depends upon the rules governing your 401k. It's possible that you could take a loan or withdraw part of the account to pay off the loan, if you have enough saved in there. Some administrators will only let you take loans, in which case you'll be liable to pay yourself back the money on a regular basis. This is an attractive alternative for dealing with student loans.

Otherwise, you might be able to withdraw a portion of the account. Since you're probably under retirement age, this means the income will be subject to regular income tax rates, and you'll be hit with an extra 10% tax penalty. If this is the case, I recommend not withdrawing significant funds all at once.

Instead, do some this year, and the rest the next. If your loan is five figures or more, you would have to withdraw more than this amount all at once to pay it off. This isn't wise since your tax burden will increase by quite a bit, and you might not have enough to complete the loan at once and pay these crippling taxes.

 
 
 
 
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