'Should I roll over my 401(k) or use it to pay off student loans?'

(MONEY Magazine) -- Now that I'm going to be a stay-at home mom, I'm wondering whether I should roll the $24,000 in my 401(k) into an IRA account or cash it out to pay off my student loans. My husband makes a pretty good income, but I thought that paying off the loans might make things easier on him now that we'll no longer have two incomes. What do you think: Should I roll the money over or use it to repay the loans? -- K.N., Corcoran, Minn.

I applaud your desire to make things easier on your hubby since he'll now be the sole breadwinner in the family. But I still think you're better off rolling your 401(k) funds into an IRA account, investing it in a diversified portfolio of low-cost mutual funds and letting it grow until retirement.

One reason is that it usually doesn't make financial sense to withdraw funds from tax-deferred accounts like a 401(k) or IRA to repay student loans. Student loans tend to carry lower interest rates than the investment return your retirement savings are likely to earn over the long term, plus they are often tax-deductible.

That typically means the after-tax interest expense you would avoid by using the money in your retirement account to repay the loan is less than the after-tax investment gains you could collect by keeping it in your retirement account and letting it rack up tax-deferred returns.

Even if the interest savings versus investment gains calculation is a close call, there's another factor that's likely to tilt the decision in favor of rolling the money over: the penalty for early withdrawals from retirement accounts.

If you take money out of your 401(k) or IRA prior to age 59 ½, you'll not only owe tax on the distributions but a 10% penalty as well. That means you'll have to give up a lot more than a dollar in retirement savings to get a dollar of debt relief. For example, if you want to pay off $10,000 in student loans, you would have to withdraw $15,385 from your 401(k) or rollover IRA in order to have enough to pay the loan after covering income tax and the 10% early withdrawal penalty, assuming a 25% tax rate.

There are exceptions to the 10% penalty for both 401(k)s and IRAs. Based on what you've told me, however, it's unlikely you would qualify for one. Even the waiver for paying qualified higher education expenses from an IRA wouldn't help in your case, says CCH tax guru Nick Kaster, since it doesn't apply to payments on student loans that were taken out in years prior to the actual IRA withdrawal.

But there are two other reasons I think you ought to roll your $24,000 into an IRA. The first is that if this stay-at-home gig is going to work, you and your husband must learn to make whatever accommodations are necessary to adjust to life on a lower income.

To the extent you rely on funds from a 401(k) or other sources to repay student debt or, for that matter, meet other expenses, you're not living solely on your husband's income. So if you really want to continue being a stay-at-home mom, you and your husband need to adjust your lifestyle and spending to the realities of one paycheck. Better to do that right away than dip into savings and get a false sense of how you're faring under your new arrangement.

Finally, I think you should hold onto your retirement savings because it would be a shame to give up the nice little head start on your future retirement security your 401(k) dough represents.

A $24,000 balance may not seem like such a big deal now. But even if you don't add another cent, it could grow to more than $135,000 in 30 years, assuming a modest 6% annual return. That sum could come in handy at retirement time, especially if you and your husband aren't able to build as large a nest egg as you might expect because of the constraints of living on one income.

Who knows? At some point you and your husband may decide that you have no choice but to dip into your stash to meet unexpected expenses. And if that happens, you'll want to check again to see if you qualify for one of the exceptions to the early withdrawal penalty for IRAs.

But the longer you can put off doing that, the more you'll have available should you need to tap this dough prior to retiring and the more you'll have during retirement if you don't.

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