Thank you, mlipps! That is exactly the information I was looking for. I read and read and read on these topics, but sometimes it's hard to understand how they actually apply to my particular situation.

Unfortunately the SL interest information provided is incorrect. Getting accurate information is critical here. The rest is all good.

Some notes:

1) $21,000 * 6.55% = 1,375, not $2,500. Unless you have a lot of accrued, unpaid interest, or unless your balance was substantially higher during 2015, you won't reach the $2,500 allowed deduction.

2) The SL interest deduction is phased out between $125K-155K M.AGI. If your MAGI is $140K (exactly 50% into the phaseout) you will receive exactly 50% of the deduction. It's a sliding scale based on where you land in that range. So your deduction could be limited if you don't contribute the $20K you're currently on pace for in the 401k's because your AGI is in that range.

3) As mlipps correctly pointed out, the $12,600 standard deduction reduces taxable income, not AGI, so your AGI is higher than you listed in all cases.

4) What is the $6,000 PFD?

5) Unless you qualified for an exemption as a first time homebuyer or something, you will likely have to pay the 10% penalty on the IRA withdrawal which equals $2K. It looks like you may have included this already, but I'm unsure.

I calculate your tax in #1 to be $19,594 including penalty. AGI = 124,625

I calculate your tax in #2 to be $15,594 including penalty. AGI = 108,625

I calculate your tax in #3 to be ??. I don't want to bother with a partial IRA deduction, and I don't think you should either.

I would go with option #2.

One more question, then. Say our income level stays the same (minus the IRA withdrawal) next year, and we've paid off our student loans in the first half of the year. We've got the cash in hand to fund IRAs--at that point we should choose ROTHs because on a traditional we're basically paying taxes at both ends?

In 2016, assuming all else is the same other than IRA withdrawal, your AGI will be $89,500 ($126K - 36K - 500 SL interest guess). This means you are eligible for a full deduction of T.IRA's. You can make those contributions if you want, or Roth IRA's, or invest in taxable accounts. Once you get into this range it's a case by case basis. After the standard deduction and exemptions your taxable income would only be $68,900, so you're solidly in the 15% bracket and your tax would only be $9,413. At that point contributing to tax deferred accounts doesn't save you as much, but I think it's still worth it.