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Should I Use an Inheritance to Pay Down My Student Loans? – NW

“Dear Steve,

My father passed in 2008. He left me approx $50,000 from his 401k account. I’m able to leave the money in the account for 3-5 years. At that time, I’m considering using that money to pay down my $109,000 student loan consolidated debt. Will the tax liabilities be worth it? My current gross income is $54,000. I have $19k credit card debt & $36,000 mortgage & $20k in my own retirement fund.

Should I use the inherited 401k to pay down $109,000 student debt or to increase my retirement fund? I don’t qualify for any known forgiveness programs.


Dear NW,

You’d need to talk to a tax adviser to plan the tax consequences of such a withdrawal. But of the after tax money it would probably make more sense to pay off the credit card debt if it is at a higher interest and then put at least $2,000 or more into a savings account to build up an emergency fund for yourself. It’s the one thing you didn’t mention you had. And without an emergency fund, surprise expenses will wind up on expensive credit cards again.

Then with the remaining money one option would be to divide it up into thirds. Put 1/3 into your retirement account, pay down student loans with 1/3 and then go blow 1/3 and have some fun with it. Life is meant to be lived at some point.


You are not alone. I'm here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don't give up.

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About the author

Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.


  • I do have one more question. As I create my new budget, after utilities, food & gas, etc, I have $1910 left. I’m considering the following plan: $750–Sallie Mae, $450–Mortgage, $400–Retirement, $210–Savings & $100–MeMoney :). What do you think?

  • Hi! After the 20% tax withholding & approx. state tax withholding, I paid off my credit card debt, started my savings account, & paid $10K towards the student loans. Since I’m in the 25% tax bracket, I’ll have to pay the remaining 5% tax on my 2010 tax return but I can easily save for it now that I am FREE FROM CREDIT CARD DEBT!!!!! Thanks for your advice!

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