A: While it makes sense to pay off a 7.9 percent loan if you can, doing it from a qualified plan doesn't work very well. Paying all of it at once could put you in a higher tax bracket. Your current income is taxable at a maximum of 15 percent.
But if you add a $40,000 withdrawal to that income, part of it will be taxed at 25 percent. So you'd be saving 7.9 percent interest by paying an additional 10 percent in income taxes.