Cash out ROTH IRA to pay off LOC??

iVillage Member
Registered: 07-24-2001
Cash out ROTH IRA to pay off LOC??
10
Mon, 07-15-2013 - 4:32pm

Help me think this through . . .

We owe $15,312.87 to a LOC.  The interest rate on this loan goes up to 5.25% next month.

We have $11,000 in a ROTH IRA that we put in 1.5 years ago, and it is currently netting -.33% (basically breaking even).  Obviously, I'm not happy with these results.  We are earning closer to 5-6% on our other investments.  This IRA is with an investment company associated with the bank where we have our LOC.  I would NOT keep contributing to these accounts (but would rather open new accounts at a different place - I just don't really trust the guy managing the accounts).   

I just can't help but notice, we are PAYING 5.25% (soon, it's lower now), but EARNING nothing with this bank.

(When we put this money in the IRA we didn't anticipate the expense we put on the LOC . . . the LOC is a student loan we co-signed for our dd  . . . so in retrospect, we should have just paid toward the debt instead of making this investment.)

My understanding is that there is no penality for withdrawing the amount we put in to the IRA (you are only penalized on any earnings - which there are none).

If we did this, we could have the LOC paid off by Sept (which would make us debt free except for the mortgage on a house we are trying to sell).  At that point, we'd start fully funding new ROTH IRAs with a different investment company.

Does this make sense?  Am I missing anything??

iVillage Member
Registered: 04-16-2008
Wed, 07-17-2013 - 12:12am

You are absolutely right!  There is no penalty at all (other than perhaps opportunity costs, but that's an entirely different issue) to withdraw your contribution in a ROTH.  Whoever said there is a 10% penalty if you are under 59 1/2 is confused.

iVillage Member
Registered: 07-24-2001
Tue, 07-16-2013 - 11:14pm
Oh yeah, I forgot to also say, since ROTH IRAs are funded with post tax funds, there should be no income tax owed on the money taken out either.
iVillage Member
Registered: 07-24-2001
Tue, 07-16-2013 - 11:02pm

Hey thanks for all the feedback . . . it really is helping me thing things through.

To clarify a few things (and perhaps answer some questions).

1) No, this is not our only retirement fund.  (This was opened with the thought of diversifying a bit more)

2) This investment was made prior to finding out we would need to become responsible for this particular debt.

3) My LOC is NOT a HELOC.  It is NOT tax deductible.

4) There is no penalty for withdrawing, since this is a ROTH IRA, and the amount in the account now is the same as I orginally invested 1 1/2 year ago.  I wouldn't consider liquidating a regular IRA since penalities and taxes would be owed.  When I talked to an investment person at the bank (my regular guy was on vaca) yesterday she had to confirm that there was NO PENALTY (and call me back). . .  which seemed weird to me . . . since she is the person who really should be in the know - I mean how come I knew that and she didn't, kwim?...it made me feel like she was trying to throwing me off a bit (but I just might be paranoid). 

4) She also indicated that I was calculating the returns incorrectly and, in fact, WAS making money . . . but that simply didn't match what my statement said.  I requested she provide a full accounting of all transaction (including fees paid) and she did . . . the statements that I recieved quarterly are very vague . .  and THAT was where the discreptency was . . . in the fees paid.  I was charged more fees than I thought I was going to be charged.  (Which, again, kind of hits me wrong . . . since I'm usually good about paying attention to those types of details.  I even told the woman, "Listen, I'm someone who clips .25 coupons for sugar AND waits for the day when it can be doubled before actually buying the sugar, so it seems unlikely that I simply "forgot" an additonal $150 fee that was charged to me." )  

But now this leaves me thinking more. . . if these were simply reasonable (although undisclosed . . . and I'm even going to say INTENTIONALLY undisclosed fees (I say "intentionally" since I had a specific conversation regarding the fees associated with three of the ETFs included in my IRA that turned out to be charged differently than I was told - in fairness perhaps it truly was a miscommunication, but this is the exact reason I kind of have a bad feeling about this broker guy . . .. anyway) ) fees for starting a new account with someone, than perhaps I should consider this too since even if I pay off of the LOC with the ROTH IRA funds, I'll be starting a new ROTH IRA again soon.  And a new ROTH very well mean new fees that need paying (that might amount to more than the interest amount I'm paying on the LOC).

I'm not trying to be a completely ridiculous.  I know that broker need to make their money too.  But I feel like this particular relationship is a bit tainted.  Whether I move these funds or not, I'm still going to be looking for a new financial guy.

Many things for me to think through.  Again I appreciate your feedback. Any more thoughts?

iVillage Member
Registered: 12-31-2010
Tue, 07-16-2013 - 4:43pm
OH MY Bumbling - DO NOT DO THIS, please, or at least think of the following: If you are under 59 1/2 you will have a 10% penalty on the withdraw. You could roll it into another account with someone that is a bit better at managing funds and it could make a decent return. Just the Standard & Poors 500 has made double digits the last 3 years alone and you can find a mutual fund to roll that into. PLEASE get some advice as your current bank does not seem to be meeting your needs. Your HELOC may be a tax deduction for you, cashing in the Roth you may not only have the 10%, but you will now lack any tax deduction you were taking for interest paid. How about putting extra on the HELOC, moving the Roth to a better investment and letting it sit there. SOOOO wish I could reach through the screen and really help you personally, but I hope I have given you things to think about.
#Marie
Avatar for mahopac
iVillage Member
Registered: 07-24-1997
Tue, 07-16-2013 - 2:36pm

Since it's a Roth, and it's new, and cashing it out brings you thisclose to debt-free, I would go for it, absolutely!  In fact, I would never have opened the Roth IRA before paying off the debt. 

I took the approach of (1) pay off debt, (2) send kid #1 to private school and college, (3) contribute the max to my IRA, (4) send kid #2 to college, (5) send kid #3 to private school and college, (6) pay off mortgage, (7) save EVERYTHING for retirement.  I'm on step 5 now, hope to be done with 5 & 6 in the next 5 years, and then be at step 7 until I retire - hopefully no more than 10 years after that.

iVillage Member
Registered: 10-09-1999
Tue, 07-16-2013 - 10:37am

I say yes & we did...we had a roth & we were contributing $200/mth to it...we had it for 5 years & it did make some interest...we'll pay income taxes on the earnings only...but we are so intense on paying off our mortgage that by applying this roth $ & cutting out the $200 per mth going to the roth & applying that to our mortgage we were able to really speed up our debt free date...we'll be debt free this Dec & I can't wait...it'll be my 50th birthday present!!!  We have $400,000 in retirement savings & will start contributing 15% of our gross income to our retirement as soon as our mortgage is gone in Dec.  I think everyone's situation is different but for us at our age & being so focused on being debt free it was a really good decision for us.  I don't think you feel this money is a very good investment anyway, that $ will do more for you paying off your LOC.  Do your research & read, read, read & find a good place for your retirement funds!  Best of luck & here is to working hard to become debt free!!

cindylee

iVillage Member
Registered: 10-28-2009
Tue, 07-16-2013 - 8:53am

I think this plan would work and make sense. You are right, you can take out your original investment without a penalty, and not pay any taxes, because this is a ROTH IRA.

The only thing I would consider is - if you are going to open a new Roth later, which I think you should, there are income limits. I don't know your income, but just make sure you & the DH fall within the criteria.

Let us know what you decide, good luck!

Community Leader
Registered: 01-03-2004
Tue, 07-16-2013 - 4:18am

Absolutely DO NOT cash out a 401K to pay off your debt!

A 401K is a LONG TERM investment. It's not a cash savings account. It's returns are calculated for the future and they should NEVER be considered against a time-sensitive note. If you aren't happy with the return on your 401K than I'd talk to your investment advisor about moving the funds to an investment with a better return potential.

It's also money you won't easily put back AND yes, you will pay a penalty (20%) if you cash it out....that's a very expensive payoff. DON'T DO IT.

And if you don't believe me, check with a certified investment counselor. They'll tell you the same thing.

Pay off the loan the old fashioned way: snowball it. If you are servicing no other debt than a mortgage that's listed for sale put everything you can into the LOC and pay it off. It might take you 12-18 months with concentrated effort. 

iVillage Member
Registered: 05-08-2006
Mon, 07-15-2013 - 9:14pm
When I read the title of your post, I was thinking 'no' but after reading the post, I am thinking 'yes'. The interest rate difference is significant. The money hasn't been there long. The debt wasn't something you did frivolously...I know your daughter has health issues and can't pay the loan. I know you are feeling debt fatigue, and this will move you to debt free quickly. And even if you don't cash it in, I would look at moving it if you don't trust the guy at the bank...I have some money in CDs earning not much because I am risk averse, but the market is too good to be sitting at that low a return rate...you can do better, and I think your idea is a good one.
Community Leader
Registered: 08-25-2006
Mon, 07-15-2013 - 5:11pm

I suppose if this $11,000 is litterally what you have put in, meaning you could have been putting this exact same money towards the LOC, and there is no penalty (what about income taxes?), then I suppose it would make sense. 

You have other retirment, is that correct?  If so, then I would be very tempted to do this.  Like you said, unless I am missing something.  Embarassed 

Serenity

Serenity