Using a 0% APR cash advance to fund Roth IRA

[Zoot Allures]

With the end of the year fast approaching, I decided to do something kind of risky and kind of fun: use a cash advance offer from my Bank of America credit card to fund my Roth IRA for 2013, which I wasn't able to do earlier in the year. I know I have until next April to fund my IRA for 2013, but I wanted to get it done before year-end. I plan to max out my 403(b) and my Roth next year, so I won't be investing less just because BofA gave me some free money. I have no other CC debt.

The offer was for 12 months at 0% APR. I'll either pay it off over the year or make minimum payments and do a 0% balance transfer when the year is up, assuming one is available at that time. The fee for using the access check was only 2%, which is lower than I've seen in comparable offers. So it cost me $100 to borrow $5,000. This wasn't a balance transfer but a straight-up cash advance, which seems like a pretty good offer and not very common. I expect my Roth IRA to do better than 2% over the next year, so there's my rationale.

I used to feel pretty out of control and helpless with respect to my debt, so it's kind of pleasurable to use it as an instrument in this manner. Ideally I would have funded my Roth for the year already, but this act of minor arbitrage seems like a better alternative to leaving the Roth unfunded and missing out on many years of growth.

Anyone else done this or something similar recently? Anyone object to it on principle? Seems like the trick is to find those near-0% fees, which were common in the old pre-crash days but are more rare today.

[Argyle]

I applaud you for wanting to get money into your IRA; but "kind of risky" sure does apply.  You've lost 2% on the transaction already.  I hope you stay employed and no emergencies intervene to keep you from being able to make the payments.  Note that in many cases, you get the 0% for a year, but if at the end of the year you haven't paid off the money, you then owe all the interest for the whole year -- at 20% or whatever the rate is.  And nowadays balance transfers typically cost money too -- typically 3%.  So that would be 5% you'd paid to save your money.  Many of us would love to get 5% savings rates on our money -- and effectively you could too, by just putting in money once you've saved it, and by not shuffling the debt around between cards.

Basically, if you have the money to make the payments every month -- say $450 or whatever -- then you're better off stashing that directly into your IRA. 

Again, I applaud you for being determined to put money in an IRA.  Next time, put it directly in.

[Zoot Allures]

Points well taken, Argyle. This was more of an experiment than something I'll make a habit of. And again, when you look at the alternative--leaving my IRA unfunded for 2013--I think this was a reasonable thing to do, given the low cost of the loan and other factors like the stability of my employment.

I do think the best thing to do now is divide the loan amount by 12 months and pay it off over the course of the year, even if I do regularly get no-fee 0% balance transfer offers.

[Mazzinator]

I did it as a transfer of my high interest student loans to a cc with 0% and 0 fees. So totally free money, unless a big emergency or fuck up of course. I use mine like a loan and never use the cc otherwise.

I'm paying minimum payments until the last 2 or 3 months, then i will focus all energy on it. I felt very uneasy with this at first, but desperate times call for desperate measures, right??

Like pp said be careful!!

[chasesfish]

Do you plan on having your income go up significantly next year?

I don't know if I would do it again, but I used some student loan money when my wife and I were first married to max both of our Roth IRAs.  However, I was getting a nice refundable tax credit as part of the deal because of our absurdly low income.

We now go in and out of being eligible for them and are glad we did it.

[Michread]

IF you're paying off the cc to pay for 2013 ROTH, how will you fund your 2014 ROTH?

We took a car loan this year for half the price of the vehicle to get the dealer cash incentives, but we had the cash to buy the whole vehicle. We took the loan which will cost us $650 (which we got back off the price of vehicle) over 3 years.  We plan to pay it off in one year.  We put the loan amt, we would have purchased the vehicle with, into S&P 500 index and already have more than covered the cost of the loan.

[FI2020]

As others mentioned, your biggest risk is an event that would cause you to not be able to pay off the loan.  Especially as I assume you are not caring an emergency fund.   

From a pure investment perspective, what you are doing is a form of market timing.  I get you are also trying to capitalize on the tax benefit of the Roth, but I'm not sure it's worth it if it cost you -2%.

In a past post, you mentioned you carry a 60/40 asset allocation.  Personally, I'm not a fan of (best case) taking a -2% hit on the loan and then putting that money into bonds where many think it would be optimistic, in the year ahead, to get a +2% return.  This strategy could make sense for someone with a ton of risk appetite and is comfortable being 100% equities.  Since you are not willing to take the risk with your equity allocation(which sounds like a prudent decision), I don't think it's worth borrowing money to invest. 

[Jamesqf]

I applaud you for wanting to get money into your IRA; but "kind of risky" sure does apply.  You've lost 2% on the transaction already.

Not necessarily - I think, anyway: I'm not really sure about Roth IRAs.  But with a traditional IRA, you'd be paying 2% to save anywhere from 10% to 25% of the $5K on income tax.

[imustachemystash]

I think it is creative, interesting, and risky (for all the reasons above).  You should come back later and update us on how it turns out! 

[Argyle]

The OP is paying 2% not to lose the tax benefits, but that assumes that the OP couldn't have invested in the IRA without borrowing the money.  He "wanted to get it done before year-end," but why?  He had till April 2014 to fund the IRA.   If he has the $450 per month (payment on the loan), why not put $450 per month directly into the IRA?  $450 per month from November through April is $2700 toward a 2013 IRA.  If he couldn't swing the whole $5000 at once, why not put $2300 on the credit card and contribute the rest of the IRA ay $450 per month from now till April?  That would save $50 right there.  You can buy a lot of lattes, or even some extra savings and interest, for that $50.

And if he really couldn't manage the extra $2300 to max out the 2013 IRA, and therefore had to put it on the credit card, will that $2300 be available in 2014?   If he's also fully funding a 403(b)and a Roth IRA for 2014?  What's different about 2014 that makes the money available then but not now?  The OP hasn't explained so I don't understand.  What I'm getting is that he did it because it's "kind of fun" -- maybe feels like pulling a fast one on the credit card company?  Except they've pulled a fast one by charging $100 for the fun.  And who knows what kind of surprise need for money is coming down the pike?  Why keep shuffling the debt around by thinking about transferring it to another 0% card?  I don't get why that's more fun than having the thing genuinely funded.  What I do know is that surprises can clobber you and suddenly the debt isn't so much fun any more.  Anyway, that's my concern.

[beltim]

I like it! $100 is a small price to pay for being able to forever void taxes on gains on this $5000. The naysayers here appear to have misread the OP, who specifically says he will fully fund the 2014 403b and Roth IRA.  The decision is then a simple one: is it worth $100 to avoid taxes on this $5000? The obvious answer: yes! 

Nicely done

[Argyle]

My point is that if he has the money to full fund the 403(b) and the 2014 IRA, does that use up the available money for investing in 2014?  If not, why can't he fund the 2013 IRA directly by April 2014?

[beltim]

No, it doesn't use the 2014 money according to the OP.  that suggests two possibilities: 1) he could fund the 2013 contribution in the first few months of 2014, and chose to pay $100 to do it sooner; and 2) there's some reason that he wouldn't be able to fund it in the first few months Of 2014 (maybe a raise?).  I don't see why the assumption should be the OP is doing something wrong

[Argyle]

It's the $100 he's paying to do something that might be risky (because of uncertainty in the ability to pay back the $5000 without an additional penalty).  Mustachianism looks askance at even "small" amounts like $100 when there's a way to do the same thing for less.  Now, maybe there wasn't a way to do the same thing for less.  That's unclear.  But Mustachianism is also about finding ways to do things for less, and so that's what I was aiming at.

[Will]

I like it! $100 is a small price to pay for being able to forever void taxes on gains on this $5000. The naysayers here appear to have misread the OP, who specifically says he will fully fund the 2014 403b and Roth IRA.  The decision is then a simple one: is it worth $100 to avoid taxes on this $5000? The obvious answer: yes! 

Nicely done

How is he avoiding taxes on the $5000 if he is funding a Roth?  And why $5000?  Why not $5500?

[beltim]

I like it! $100 is a small price to pay for being able to forever void taxes on gains on this $5000. The naysayers here appear to have misread the OP, who specifically says he will fully fund the 2014 403b and Roth IRA.  The decision is then a simple one: is it worth $100 to avoid taxes on this $5000? The obvious answer: yes! 

Nicely done

How is he avoiding taxes on the $5000 if he is funding a Roth?  And why $5000?  Why not $5500?

He's not avoiding taxes on the $5000.  I said he was avoiding taxes on gains on this $5000.

As for why $5000 rather than $5500, I have no idea.

[Zoot Allures]

Hey, thanks for the thoughtful replies, folks. At the very least you've confirmed for me that any act of borrowing or arbitrage, no matter how small, warrants careful consideration. Just to reply to a couple of concerns that people raised: yes, I will be maxing out my 403(b) and my Roth IRA for 2014. I maxed out the former for 2013 but wasn't able to do so for the Roth. Next year I will. It's possible that in addition to next year's 403(b) and Roth, I would also have been able to fund my 2013 Roth by next April the old fashioned way. But I decided to pay $100 to get it done now, for two reasons: it gives me peace of mind to know the 2013 Roth is now fully funded, and I have those "employees" working now instead of 6 months from now. (I don't really see that as "market timing.") But it's true: I am now making CC payments instead of directly funding the Roth. Point taken.

[frugalcoconut]

I had a similar situation to the OP.  Late last year I was preparing to do a HARP2 refinance on my rental property before the program ended and while rates were moving downward.  Since I don't keep much liquid cash on hand, I knew I had to save every spare penny to cover the closing costs.  So the money that would normally have gone toward funding the Roth IRA for 2012 was being set aside specifically for the refinance which I ended up completing in early April 2013.  Since I only had a couple thousand extra available after the refinance, I temporarily dipped into my line of credit to put the full $5,000 into my Roth IRA for 2012.  Meanwhile I had lowered my Roth 401k contribution to 6% (enough to get the company match) with the plan to raise it to 50% (highest allowed by my employer) starting in May in order to make up the difference and max out to $17,500 (which I accomplished a week ago).  I hate playing catch-up with my Roth IRA ... but I'm just now getting to the point where I can save again toward it.  I should be putting in the $5,500 for 2013 in a couple of months, and then hopefully things will stabilize as my Roth 401k contributions go back to normal in 2014 (in addition to higher salary from a raise due to promotion).

[bogart]

Others up-thread have raised the "emergency" concern; but if the principal in the Roth is in cash-equivalents (i.e. is safe, not in e.g. stocks), it can be withdrawn at any time.  So if the OP e.g. loses his job, he can pull it out, pay off the vast majority of the loan, and not be set back much relative to his starting point.  In short, the risk on this strategy is pretty limited, assuming it's implemented well (cash equivalent for the Roth funds), which is not, of course, the same as zero.