Author Topic: Taking out loan to maximize Roth IRA  (Read 3784 times)

khangaroo

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Taking out loan to maximize Roth IRA
« on: March 20, 2017, 03:48:00 PM »
I didn't have the room in my budget to invest in my Roth IRA so what I did was take out a $5,500 loan @ 4.59% to maximize my contribution. My plan is to pay off the loan in several months, the actual term is 60 months with a monthly payment of ~$100 - this gets withdrawn from a savings account.

Background info: Debt-free (besides this loan) with no mortgage. I have enough in my savings to cover the loan and the reason I don't have room in my monthly budget is because I'm cash-flowing an MBA.

I just wanted to get your perspectives on this approach.
1. General thoughts?
2. Are there risks I'm not seeing besides if the market tanks?
3. Would it be worthwhile to take out another loan right now to be in the market for the 2017 tax year instead of waiting until next April to get the loan?

mustachianteacher

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Re: Taking out loan to maximize Roth IRA
« Reply #1 on: March 20, 2017, 03:57:07 PM »
This seems like a pretty risky and unusual strategy. I mean this very sincerely, but what's your thinking behind this?

Because you're investing in a Roth IRA with money you've already paid taxes on, you basically have to earn more than $5,500 in order to have $5,500 in hand. If you're in the 25% tax bracket, you had to earn $7,333. And then, on top of that, you're paying 4.59% interest. I know you said you'll pay it off in a few months, but whatever -- you're paying interest, effectively adding to the cost of that $5,500.

If you can pay off the loan in a few months, why not just save the money from those few months and invest it as you have it? The market is on fire right now, and while I strongly urge against any attempt at market-timing, it's not like we're bottoming out and these low prices won't last. Quite the contrary.

rothwem

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Re: Taking out loan to maximize Roth IRA
« Reply #2 on: March 21, 2017, 07:22:20 AM »
This seems like a pretty risky and unusual strategy. I mean this very sincerely, but what's your thinking behind this?

Because you're investing in a Roth IRA with money you've already paid taxes on, you basically have to earn more than $5,500 in order to have $5,500 in hand. If you're in the 25% tax bracket, you had to earn $7,333. And then, on top of that, you're paying 4.59% interest. I know you said you'll pay it off in a few months, but whatever -- you're paying interest, effectively adding to the cost of that $5,500.

If you can pay off the loan in a few months, why not just save the money from those few months and invest it as you have it? The market is on fire right now, and while I strongly urge against any attempt at market-timing, it's not like we're bottoming out and these low prices won't last. Quite the contrary.

I'm not sure why it matters that he paid with post-tax money, since a Roth IRA is post-tax anyways. 

Total payback is $6166, so that's what he's got to make in the Roth IRA in 5 years to make up for it. 

This will be an interesting experiment.  khangaroo, can you keep this thread updated with a running balance?  I'd like to see if you beat the loan!

frugaliknowit

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Re: Taking out loan to maximize Roth IRA
« Reply #3 on: March 21, 2017, 07:44:54 AM »
Is this for your 2016 Roth?  The reason I ask is, if it is for your 2017 Roth, you have more than another year, in which case I would definitely not take out a loan to fund it.

Noahjoe

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Re: Taking out loan to maximize Roth IRA
« Reply #4 on: March 21, 2017, 08:38:11 AM »
The thing is, you'll never get another chance to fund that IRA money and get the tax break when you withdraw. It IS an unusual strategy, but at 4.59% you're probably going to be fine. And the long term tax benefits (not paying taxes in retirement) are likely to make this worth it. If you're otherwise debt free, and you can pay it off if you needed to, then I say good job for being creative.

boarder42

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Re: Taking out loan to maximize Roth IRA
« Reply #5 on: March 21, 2017, 09:23:45 AM »
i'd do it.

Heroes821

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Re: Taking out loan to maximize Roth IRA
« Reply #6 on: March 22, 2017, 02:36:43 PM »
If it's for a 2016 IRA I could see it, but I would think that if you can't put it in a tIRA it probably isn't worth taking a loan and putting it in a roth.

I did a similar thing to fund my wife and I's tIRAs for 2016 before April 15th.

FindingFI

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Re: Taking out loan to maximize Roth IRA
« Reply #7 on: March 23, 2017, 06:42:46 AM »
Since there's only a few weeks left before that tax-advantaged space for 2016 disappears, I say go for it.  you are young, so that contribution has time to grow.  While you are paying off the loan the earning may not be substantially higher than the interest, they may even be lower depending on the market.  But once the loan is paid off, the IRA will continue to accumulate tax-free earnings. But I wouldn't take out a loan for 2017 yet since you still have over a year to make those contributions without debt. 

Proud Foot

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Re: Taking out loan to maximize Roth IRA
« Reply #8 on: March 24, 2017, 11:23:11 AM »
Is there a reason you want the loan rather than using what you already have in savings?

GregO

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Re: Taking out loan to maximize Roth IRA
« Reply #9 on: March 24, 2017, 02:59:49 PM »
Is there a reason you want the loan rather than using what you already have in savings?
This was my initial response.  If you have the money in an account, why not use that and pay yourself back?  If you need the money for an emergency before you've replenished your savings account, you could either take your contribution back out of the IRA or get a personal loan at that point.  A lot of people use their Roth IRA as part of their emergency fund anyway, that's essentially all that you'd be doing.

khangaroo

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Re: Taking out loan to maximize Roth IRA
« Reply #10 on: March 26, 2017, 10:37:57 PM »
Is there a reason you want the loan rather than using what you already have in savings?

As I'm cash-flowing a part-time MBA program, I want to have the cushion in my savings account as that's where I'm withdrawing my tuition payments from. If I happen to lose my job then I want to be able to make my tuition payments for a few months while I do a job search and continue to let the IRA grow.

boarder42

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Re: Taking out loan to maximize Roth IRA
« Reply #11 on: March 27, 2017, 09:54:23 AM »
exactly its cheap insurance. Its always easier to ask for and get money when you dont 100% need it rather than when you're in dire need. 

I actually read an article about this the other day about some billiionaire who said cheap fixed rate loans are a great path to wealth esp. when obtained when not needed. b/c you never know.  And the OPs situation is obviously a good one and good reason to take it out. 

Proud Foot

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Re: Taking out loan to maximize Roth IRA
« Reply #12 on: March 27, 2017, 10:47:47 AM »
Is there a reason you want the loan rather than using what you already have in savings?

As I'm cash-flowing a part-time MBA program, I want to have the cushion in my savings account as that's where I'm withdrawing my tuition payments from. If I happen to lose my job then I want to be able to make my tuition payments for a few months while I do a job search and continue to let the IRA grow.

I see nothing wrong with this.  Thanks for the response!