Author Topic: Roth IRA & High Interest CC  (Read 4737 times)

THATlibartsgrad

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Roth IRA & High Interest CC
« on: March 21, 2014, 02:47:03 PM »
Newbie here guys, so take it easy *closes eyes and dutifully prepares for facepunch*

After falling for the idea that a private education will pay itself off in future earnings (false...), I found myself months without a steady job after graduating with a MA. Temping, waitressing, babysitting, housecleaning-- all these things were barely enough to cover utilities, and that was WITH mooching off of kind friends. So excuses excuses excuses aside, I find myself in some CC debt. Yes yes, I know. BUT the good news! I got a job! With $42,000 yearly income, I've committed to putting half of my bi-weekly paychecks towards the debt  (and for the past month I've actually been getting paid, have in fact). SO:

-$5,573 debt on one card remaining
-11.99% interest rate (which just kicked in in January)
-YTD interest: $159.05
-Estimated time to pay if off... July? But my student loan repayment will kick in in May, so that may slow it down.
-A Roth IRA account my parents opened for me years ago, that I just now gained access to/the info for (woo taking control of finances!)
-5% contribution to my 401K-- my employer's match

To the question: I know I can take the contributions (not the earnings!) out of my Roth IRA without any penalty.  I know I can't put that money back.  Getting out of debt is my TOP priority-- I'm working in a field I have no interest in because it pays better than my (academic) field of choice, I plan on climbing in this field for 2-3 years high and fast, and I want my $45,000 or so of student debt ($15,000 of which is no interest family loan) GONE in 2 years, 3 MAX. Hair. On. Fire.

Can I take the money out of my RothIRA to pay off my credit card and start in on my student loans?
Is this an idiotic move?
Will I regret it? Will I get better returns on investing in index funds when I'm out of debt anyway, despite losing those years of compound interest on the money I take out?

Behaviorally I'm not worried about this move; every time I've swiped my credit card the past several months I get nauseous. I've been on a journey to minimalism and love it and will never go back. The student debt is quite enough motivation for continuing my debt-repaying behavior, and to wipe the disgustingly high interest stupid tax out would be SUCH a load off my shoulders.

Help me, wise ones!

Gimesalot

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Re: Roth IRA & High Interest CC
« Reply #1 on: March 22, 2014, 09:37:38 AM »
I would not take money from the Roth to pay the CC debt.  You would end up selling at the record peak of the market.  You would have fewer years of compounding.  I would instead try to find a balance transfer offer to a 0% credit card.  If the fee to transfer is less than the expected interest over the next couple of months, about 3%, then I would transfer.  Pay that off over however many months the 0% lasts.  Second, learn about your student loans.  What is the interest rate?  Is the rate fixed or variable? Given your studies, are there forgiveness or assistance programs?

phred

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Re: Roth IRA & High Interest CC
« Reply #2 on: March 22, 2014, 09:53:52 AM »
Pay off credit card pronto as 12% is a lot of interest unless you can balance transfer to a much cheaper card -- check for transfer fees.  However, I would not deplete the ROTH.  Continue with employer match.  However, index funds can go down in value -- as seen during the last recession.

What is the interest on the student loan?  Consider working some weekends babysitting, housecleaning...

TreeTired

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Re: Roth IRA & High Interest CC
« Reply #3 on: March 22, 2014, 10:45:30 AM »
Quote
You would end up selling at the record peak of the market.
what's wrong with that?

Just curious -  How did your parents open an IRA for you?  Did you have to show income?

Jamesqf

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Re: Roth IRA & High Interest CC
« Reply #4 on: March 22, 2014, 10:56:31 AM »
Pay off credit card pronto as 12% is a lot of interest unless you can balance transfer to a much cheaper card -- check for transfer fees.

Last I checked, the Chase Slate card was still offering no-fee transfers, and 0% interest for a year or so.  Failing that, I would take the money out of the account.

You would end up selling at the record peak of the market.

So is there a better time to sell?  Maybe the OP should wait for the next major downturn instead?  As for compounding, remember that the 12% credit card interest is compounding, too, as the student loan will be.  Taking money out of the account to pay off the CC is locking in a guaranteed 12% return, while the market on average returns about 7%.
« Last Edit: March 22, 2014, 11:03:26 AM by Jamesqf »

Catbert

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Re: Roth IRA & High Interest CC
« Reply #5 on: March 22, 2014, 11:35:53 AM »
If you can pay off the cc this year then I would leave the Roth IRA alone.  As you mentioned, once you take it out you can't put it back. 

As others have mentioned look at doing a balance transfer to a 0% card if you can do it with no or low transfer cost.

phred

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Re: Roth IRA & High Interest CC
« Reply #6 on: March 22, 2014, 02:59:33 PM »
"Taking money out of the account to pay off the CC is locking in a guaranteed 12% return, while the market on average returns about 7%."

yeah, but that 12% return is only over a small part of one year, while the 7% keeps on trucking year after year.

MDM

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Re: Roth IRA & High Interest CC
« Reply #7 on: March 22, 2014, 03:26:27 PM »
No facepunches, but a "what if...?" for you to consider:

If you had the maximum 401k ($17,500/yr, or $673 every 2 weeks) invested from your paycheck, could you still pay off the CC debt this year?

A quick back-of-the-envelope estimate says "definitely maybe" - but you would need to look at your own spending.  E.g., what are the big costs (usually food & shelter - clothing doesn't have to be much) for you, and what could you do to reduce those and reduce/eliminate all the "small costs"?  Oh yeah, that student loan - how much?

Anyway, I'm with the "don't withdraw the Roth" crowd - just more so.

The Happy Philosopher

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Re: Roth IRA & High Interest CC
« Reply #8 on: March 22, 2014, 03:52:33 PM »
Why not take the money out of the Roth, pay off the credit card, then with the money you would have been paying off cc debt contribute back to your Roth.

It's about 5500 high interest cc debt. You can contribute 5500 to a Roth each year.

Statistically speaking you will probably come out ahead by paying off 12% debt than by staying is a market which is probably richly valued.

Best option would be to do both: Transfer to 0% cc, pay down, then contribute 5500 to Roth later in the year.

Also I would max out retirement accounts before paying off student loans.  In an emergency you can liquidate retirement accounts, you can "re-borrow" student loan money you paid off.

chucklesmcgee

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Re: Roth IRA & High Interest CC
« Reply #9 on: March 22, 2014, 04:03:16 PM »
You probably should drain the IRA contributions.

That you can't put the money "back" is not much of an argument. That only affects you if you'd have the money to put back in the first place, which is happening for a long while! You can still contribute $5500 a year, which your financial situation suggests is not something you'll be exceeding for at least a few years, so the fact that you can't "return" the money is irrelevant. Even then, you're looking at what could be only minimal tax savings versus 12% interest charges right now. C

People here seem to forget that money is fungible.

Quote
You would end up selling at the record peak of the market.
what's wrong with that?

Concur in your confusion. What the market is doing has no effect on the situation.

yeah, but that 12% return is only over a small part of one year, while the 7% keeps on trucking year after year.

Incorrect. Credit card interest continues to accrue annually on the unpaid balance.

Run a few hypothetical situations with your numbers and you'll see it's worth it to drain the Roth contributions. We often have psychological biases which cause us to make poor financial decisions. A number of studies of individuals with credit card debt continue to pay interest on the balances while having enough money to pay off the debt kept in a savings account, simply because they "feel" safe having that money tucked away. The Roth IRA bit of your situation adds a bit of a snag in assessing your options, but the tax-savings are going to be minimal here.








MDM

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Re: Roth IRA & High Interest CC
« Reply #10 on: March 22, 2014, 04:22:11 PM »
yeah, but that 12% return is only over a small part of one year, while the 7% keeps on trucking year after year.

Incorrect. Credit card interest continues to accrue annually on the unpaid balance.

Run a few hypothetical situations with your numbers and you'll see it's worth it to drain the Roth contributions.
I think phred is correct on the specific point, but chucklesmcgee has it right for general reference with the "run the numbers" suggestion.

Seems you could save a couple hundred dollars in interest by paying the CC now instead of by July, but at the cost of (pick a number - 30?) years of tax free compounding and withdrawal from the $5500 taken from the Roth.  I'm guessing the 30 years tax free compounding is better, but "In God We Trust - All Others Bring Data" so I'll gladly defer to a detailed analysis.

The Happy Philosopher

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Re: Roth IRA & High Interest CC
« Reply #11 on: March 22, 2014, 04:37:18 PM »
I re-read the original post. I missed the fact that you will be paying this off in a couple of months. This is at most about $150 of interest. If you balance transfer to a 0% credit card they usually charge you a fee to do this. The fee will likely be more than the interest saved. Also, if you liquidate the Roth and buy back in later in the year remember there will be transaction costs to buying and selling...

Just pay off the cc as fast as possible and don't worry too much about the interest.

TomTX

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Re: Roth IRA & High Interest CC
« Reply #12 on: March 22, 2014, 05:20:05 PM »
It's probably not worth the hassle to drain the Roth, even though the math (mostly) works out.

Buckle down, pay off the debts, build a small emergency fund and start really building retirement savings.

THATlibartsgrad

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Re: Roth IRA & High Interest CC
« Reply #13 on: March 23, 2014, 11:58:55 AM »
Thank you all so much for the discussion. As it turns out, after having looked at the IRA Friday evening (again, just taking control here), it was only started in '08 when I graduated high school, and there ISN'T actually enough in there to make it worth draining it.
Oops.
That said, this was still really helpful. I have Navy Federal--LOVE them--and they frequently run 0 balance transfer fees/0% APR for the first year offers, so I plan on taking advantage of that when I can and live with the punch to my credit score. Since I have no plans of car or condo buying in the near future and have good credit, it should be worth it.
Any other comments though, I'd love to hear them! Thanks!