quote:
2) Your tax rate on ordinary income at the time of forgiveness will probably be higher than the tax rate is now.

3) Inflation will cause the amount of loan forgiveness in 20 years to be less in real dollars than the debt is worth today.

4) You can pay $1 in today's dollars to go toward debt. Or, you can pay 45 cents maybe in future dollars if the debt is forgiven.

These are assumptions I have definitely already considered. That paying a percentage of the debt in future inflated dollars is better than paying a $1 today. With my tax rate most likely being higher, a withdrawal penalty from a 401k would be tough to swallow.

If you assume the above, considering the tax benefits from pre-tax contributions and withdrawal penalty vs the capital gain tax of a taxable account with tax efficient investments, What would you do? Of course, I'd continue 401k contributions to the company match, no brainer there.

This is literally the only part of the calculation/consideration that is proving difficult to me to wrap my head around. What's annoying is, I can't find one article which says what would be the best route if you KNOW in advance you'll need a big hunk of change in the future. They all talk about 401k withdrawals exclusively due to some emergency or whatever.

I suspect it is not an "easy" calculation due to tax rate uncertainty, but what is certain today is the 401k withdrawal penalty, but how likely will that be so bad that it wipes out the 401k advantages over the taxable account?

If the race is to have enough to pay the tax, which track do you put your horse on?

ETA: It seems like you'd use the same logic as some people do while investing House down payment (Which would be a one time future expense) money if that money isn't in a 401k or ROTH. Or perhaps the same logic as people who want to retire early would use, which would be a taxable account.

This post was edited on 4/1/14 at 5:06 pm