Author Topic: Question about pulling money from Roth...  (Read 4680 times)

Bikesy

  • Stubble
  • **
  • Posts: 126
Question about pulling money from Roth...
« on: January 23, 2014, 12:42:44 PM »
If given the opportunity to prepay a years worth of rent in exchange for a 10-15% discount, would it make fiscal sense to pull the money out of my Roth IRA?  Assume no funny business with landlord (happens to be my father who owns the house outright).  Seems like this would be the same as a risk free investment at a great rate.  I plan to max traditional iras for my wife and I this year.  I also have plenty of room before hitting the max on my 401k.  After prepaying I would still have a good chunk left in the Roth to function as an e-fund.

Thanks for the help!

Iron Mike Sharpe

  • Bristles
  • ***
  • Posts: 396
Re: Question about pulling money from Roth...
« Reply #1 on: January 23, 2014, 12:53:58 PM »
Get out a spreadsheet.

How much are you going to save for this one-time discount?  How much would that money make compounded, tax-free, for X years?

I can't see how that 10-15% discount would be worth it.

Bikesy

  • Stubble
  • **
  • Posts: 126
Re: Question about pulling money from Roth...
« Reply #2 on: January 23, 2014, 01:13:57 PM »
I should have been more clear...the savings would be funneled into my 401k through work.  So essentially roth down $x...401k up $x(1.15) but this would be invested over the course of the year.

dragoncar

  • Walrus Stache
  • *******
  • Posts: 9922
  • Registered member
Re: Question about pulling money from Roth...
« Reply #3 on: January 23, 2014, 01:23:38 PM »
I should have been more clear...the savings would be funneled into my 401k through work.  So essentially roth down $x...401k up $x(1.15) but this would be invested over the course of the year.

I guess I'd personally take that deal, but if at all possible don't withdraw from Roth.  Can you do an accelerated parent schedule over a few months instead of lump sum?  Without knowing why your LL needs the money it's hard to brainstorm alternatives

Iron Mike Sharpe

  • Bristles
  • ***
  • Posts: 396
Re: Question about pulling money from Roth...
« Reply #4 on: January 23, 2014, 01:52:16 PM »
OK.  Makes sense then.  Actually, I think you would be able to put even more into your 401K, because the money you are spending for rent would be post tax.

Eric

  • Magnum Stache
  • ******
  • Posts: 4057
  • Location: On my bike
Re: Question about pulling money from Roth...
« Reply #5 on: January 23, 2014, 01:53:14 PM »
According to this link*, you're allowed to re-deposit contribution withdrawals as long as it's in the same tax year.  I'm assuming you haven't made your 2014 contribution yet.  If you have, then even better, but if not, you could withdrawal your 2013 contribution and re-deposit that amount as long as it was before 4/15/14.  Do you have the cashflow for this?  If so, you might not lose any of the cap on Roth contributions.

http://www.rothira.com/blog/can-you-return-withdrawn-roth-ira-contributions


*However, I've been googling this for awhile this morning, and this is the only link I can find that talks about this.  There are a few other message board type things, but they all point back to this.  I don't know if that's because it's inaccurate, my google-fu is lacking, or if it's a rare situation so there's not much info on it.  Do we have any tax professionals with first hand knowledge that can comment?

marblejane

  • Bristles
  • ***
  • Posts: 397
  • Location: Western Slope, CO
Re: Question about pulling money from Roth...
« Reply #6 on: January 23, 2014, 04:02:42 PM »
I'm not a tax professional, but I've been researching this myself. I think that the key point from the article that you posted, Eric, is that you can only contribute the $5,000 max to a Roth each year. The maximum doesn't increase when you've withdrawn something. So, it's not really a "redeposit", it's just making a current year contribution, which might not apply to the OP if his income has phased out his Roth contribution eligibility (just guessing that it has, since he mentions funding a traditional IRA).

It seems like a good deal, but if he is no longer eligible to contribute to a Roth, it might be better to save those penalty-free withdrawals for early retirement or a true emergency.

Shor

  • Bristles
  • ***
  • Posts: 478
  • Location: Orange County, CA, USA
Re: Question about pulling money from Roth...
« Reply #7 on: January 23, 2014, 05:28:22 PM »
I found the following in regards to determining excess contributions and withdrawing.
Basically, I think, if you withdraw the contribution before the tax due date, it is not considered contributed. This only applies if you also withdraw the earnings made on that contribution, which would only apply if the account made earnings using the contribution. Most likely, if the balance ever drops below that contribution amount, then any earnings from that date on are counted toward that contribution, and will need to be withdrawn with it for that year... Ow my head.
But since it's not counted, you could then turn around and contribute for 2013 so long as its before the filing deadline.


http://www.irs.gov/publications/p590/ch02.html
Withdrawal of excess contributions.   For purposes of determining excess contributions, any contribution that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed. This treatment only applies if any earnings on the contributions are also withdrawn. The earnings are considered earned and received in the year the excess contribution was made.

Withdrawals of contributions by due date.   
If you withdraw contributions (including any net earnings on the contributions) by the due date of your return for the year in which you made the contribution, the contributions are treated as if you never made them. If you have an extension of time to file your return, you can withdraw the contributions and earnings by the extended due date. The withdrawal of contributions is tax free, but you must include the earnings on the contributions in income for the year in which you made the contributions.

jawisco

  • Stubble
  • **
  • Posts: 194
Re: Question about pulling money from Roth...
« Reply #8 on: January 23, 2014, 06:05:32 PM »
How about a cash advance from a credit card where you are only charged 2% or 3% and no interest for a year (I get these offers a fairly often or you could call your credit card company and ask for something like this).

How about taking a loan from your 401K (you pay yourself back interest)?

Both of those options are better than taking $ from a Roth in my opinion.