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We are currently paying off a school loan that has just under $20,000 principal left on it. We are considering withdrawing funds from a Traditional IRA to pay it off.
We understand that if we do that we will have to pay income tax on the distribution, but not the 10% penalty.

Here's the question: If we withdraw enough to cover that income tax payment as well, is that amount subject to the penalty?

Does this strategy make any sense at all?

All the money withdrawn is subject to the 10% penality and the income tax.

You do not give any additional financial information but I can not think of any set of facts that would have me withdraw from an IRA to pay off the school loan.

Do not do it.

If you dislike debt, direct your current investment money toward the loan, maybe get a second job, but don't touch the IRA money.
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