Take a loan from my 401(k) to pay off my student loans?

If something bad happens and you can't repay your 401k, you are going to be hit with a massive tax bill. I would not take money from a retirement plan unless you are doing it to avoid bankruptcy. Too much risk for a 1% savings.

You are missing a central con: you are forgoing (potential) returns on the 401(k) balance. The correct comparison is not the 4.25 percent vs. 5.23 percent. As you correctly note, the 4.25 percent is going to yourself, so it's not a real transfer. The correct comparison is the 5.23 percent vs. whatever the assets in the 401(k) would have earned. Since that is likely (on a risk-adjusted basis) less than 5.23 percent, that argues for taking the loan. But I think your con #1 is also crucial. It's just very risky. If you are currently now paying more than the 3 percent needed to get the match, instead consider dropping your contribution down to 3 percent and dedicating the extra money to your student loans. More reading: Just found http://www.vanguardblog.com/2009.07.10/your-401k-nest-egg-or-slush-fund.html more detailed discussion, which summarizes what I said: "the cost of the loan is whatever administrative fees you pay plus any lost return on the assets that you’ve borrowed." And http://www.vanguardblog.com/2009.07.24/401k-loans-are-you-really-taxed-twice.html follow-up article discusses the tax issues and concludes they are not significant.

I wouldn't. If you lose your job, you have to pay the 401(k) loan all back right then and there. (whereas you can defer your student loans if you have to.) Now, if you can do what kimdog says, pay the standard income tax on the withdrawl (and don't kid yourself, you can go from a 10% tax rate to a 37% tax rate with a $50k withdrawl) and not have to pay the penalty, I might think about it to be tax free. But let me tell you. I've always regretted withdrawing from my 401(k) when I've done it. I've been creamed on taxes every, single, time.

I wouldn't do this, for the reasons stated above, especially the reasons of deferment later if necessary. If you really dislike the student loans, have you considered contributing just the 3% to get the company match in the 401(k) and sending the rest of the contribution to pay off the loan?

That 50k in your 401k will likely get a return higher than 4.25%. While the last 10 years feels terrible, in 2002 the S&P 500 was at 890, and today it's at 1,433. Further, you might be getting a tax benefit today from your student loans. You will not get a similar benefit from your 401k loan. It's a huge psychological burden. And that might be reason enough to do it. But it does not make financial sense.

Student loan interest is tax deductible under certain circumstances. The potential forgone savings from giving up this deduction seems like something you want to consider. I took out a 401(k) loan to help get to a larger house down payment, and would do it again in a second. The benefits in your case seem quite small, though, and if I'm right about the deductibility, are probably negative.

Also: 3. I think the payment on the 401(k) loan would be taxed twice. Once when it is taken out of my paycheck and then again when I retire and take a distribution. Unless you are going over some maximum, the 401(k) contributions you make shouldn't be taxed. That's the point of the 401(k): tax deferred savings. You don't owe tax until you take it out.No. Con #3 on your list is correct. 401k loan repayments in indeed made with aftertax dollars (e.g., a $100 repayment decreases your take home pay by $100) and will be taxed again once you take the money out in retirement. gjc may have missed that you were talking about the 401k loan repayments and not contributions.

gjc was right the first time about #3. This is one of those unfortunate myths that never seems to die, perhaps because it in non-intuitive. Loan repayments are not double taxed. Look at it this way. You take some money out of your 401(k) tax free. You put it in your pocket. Six months later you put the money back. It isn't taxed twice, even if you don't take it from the same pocket. You took money out and you put it back. You could even take it out and put it back the same day. Nothing has changed.

Seems like a good deal, except maybe you should be sure to clear up Con#3 before you proceed. How would you be taxed twice -- wouldn't the loan repayment simply pay off the debt. Why would you be able to take a distribution from the money you use to pay off the loan?