Author Topic: Should I?? Pay debt with ROTH IRA??  (Read 3180 times)

newstache

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Should I?? Pay debt with ROTH IRA??
« on: November 08, 2016, 10:08:24 AM »
Hey pretty new here and have a questions that all of you smart people will probably answer quickly.
My wife and I have one debt only! ya, but its $80,000 in 5 different loans for school debt.
A good chunk of this debt is sitting at 6.0-6.8% interest

Debt 1) 21,810 half 6.0% other half is 6.8%
Debt 2) 11,610 all is 6.8%

I will stop here because of my next point.
I have a ROTH IRA with 25,000 in it.
Should I take it out and pay school loans?

Thanks for your help!

Field123

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Re: Should I?? Pay debt with ROTH IRA??
« Reply #1 on: November 08, 2016, 10:28:58 AM »
I think the answer is "Probably Not". 6+% is a pretty high interest rate, but the market has historically returned 7% after inflation over the long haul. More importantly, keeping the money in the IRA will allow it to compound tax free which brings your long term expected return above 7%.

I think we could give you a better answer if you gave us a more complete financial picture. Ie. how much will you be able to put toward the loans each year without pulling from the IRA?

Regardless, I think the answer will remain, 'No.".

Mother Fussbudget

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Re: Should I?? Pay debt with ROTH IRA??
« Reply #2 on: November 08, 2016, 10:34:17 AM »
+1.  I'm going to say NO.  Do NOT use your Roth IRA funds to pay off debts today, otherwise you might possibly get into the trap of treating these worker dollars intended for your financial independence as a fund you can use for ANY debt that comes along.  These are tax-free old-age dollars.  Let them simmer, and generate some returns for you - let compound interest work for you.

Instead, bite the bullet and do more to save in your monthly expenses, and put the savings 50% toward SL debt, and 50% toward additional savings.

MDM

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Re: Should I?? Pay debt with ROTH IRA??
« Reply #3 on: November 08, 2016, 10:37:59 AM »
Have you tried refinancing (Sofi, etc.) to get a lower SL interest rate?

JustGettingStarted1980

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Re: Should I?? Pay debt with ROTH IRA??
« Reply #4 on: November 08, 2016, 10:45:01 AM »
I vote NO as well.  You have only so much tax-advantaged space per year, and if you don't use it, you lose it forever.

I also recommend refinancing if possible. I used SOFI and loved their 1.9 % variable rate for 5 years for about 60K at the time (18 months ago).

I would also attack those loans like a maniac until they are gone.

therethere

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Re: Should I?? Pay debt with ROTH IRA??
« Reply #5 on: November 08, 2016, 10:47:12 AM »
Have you tried refinancing (Sofi, etc.) to get a lower SL interest rate?

Yes, I'd look into what rates you can get for refinancing. Play with increasing the monthly payments to get a lower rate. In my experience Sofi is good for high incomes and Earnest is good for those who have some money saved for retirement. They are generally soft credit pulls to get an initial rate.

The main question is how quickly could you pay down the loans without pulling from your IRA? Are we talking 1-2 years or much much longer? If its short term, keep the IRA, refinance, and start paying extra every month.

newstache

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Re: Should I?? Pay debt with ROTH IRA??
« Reply #6 on: November 08, 2016, 11:47:46 AM »
Thanks all.
I have looked in to refi with sofi and their rate was crap 6.5%
I did do this under my wife's name and credit because all of the loans are in her name.

Do you know if I can refinance her loans under my name? I would probably get a better rate.

Currently living off 50% take home and taking advantage of matching for 401K and HSA. 
currently saving $2500/mo while living rent free to build emg fund. this will be done in April 1st and then plan to move out. EMG fund (10,000) plus I would have a second backup fund that I could with draw from New Zealand with a bit of paper work and a month. est NZ fund ($10,000 USD) this would give me around 6mo emg fund which is my goal.
After that I would have $1500/mo to be able to either pay loans or invest.

401K $3000/yr +employer $1000 they match 1/3 up to 6% wage.  =4000/yr
HSA $1000/ yr + employer 250 +20% up to 1K  =1450/yr

I am wanting to pay all loans down with in 5years. Goal is done my Jan 1 2022.
Currently pay 10,200/yr to loans $80,000 left. varying rates some as low as 3%

Should I only pay loans that are above 5% and just pay min on other loans so that I can start investing more?

robartsd

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Re: Should I?? Pay debt with ROTH IRA??
« Reply #7 on: November 08, 2016, 12:08:14 PM »
Should I only pay loans that are above 5% and just pay min on other loans so that I can start investing more?

I would get the maximum match in the 401(k) before paying more than the minimum on any of the loans. Even at 6.8%, average historical stock returns leads the math to work out in favor of maximizing your tax advantaged investments before pay loans off early (but I wouldn't blame you for deciding to pay off loans with rates above 5% before maximizing tax advantaged investments - paying off loans is a guaranteed, after-tax return equal to the interest rate). I would certainly pay only minimums on loans below 5% until all tax advantaged investment space has been filled.

dcozad999

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Re: Should I?? Pay debt with ROTH IRA??
« Reply #8 on: November 08, 2016, 12:29:41 PM »
You can cosign her student loan and potentially get her a much better rate (depending on your credit). This is what I did to bring my wife's down from 6.8% to <3% (variable).

However, that's a personal choice. It goes on your credit and you are then legally obligated to pay it back, even if your wife, God forbid, were to suddenly pass away.

newstache

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Re: Should I?? Pay debt with ROTH IRA??
« Reply #9 on: November 08, 2016, 01:22:56 PM »
This is my current level to take all of the match that I can.

401K $3000/yr +employer $1000 they match 1/3 up to 6% wage.  =4000/yr
HSA $1000/ yr + employer 250 +20% up to 1K  =1450/yr


I will have to look in to the refi a little more. I would Really like to drop the $40,000 that is at average 6%

I think I will probably start with paying high interest loans back faster with $1500 extra payment starting April 1st.
the min monthly payments totals is $850/mo for all student loans.
Doing this I should be done with high interest debt in 2.5 years.

After I eliminate,destroy and concur my really high loans what should I start upping for investment?
1) Max HSA first?
2) Max 401k
3) Roth IRA
4) Vangard

Slee_stack

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Re: Should I?? Pay debt with ROTH IRA??
« Reply #10 on: November 08, 2016, 01:48:37 PM »
This is my current level to take all of the match that I can.

401K $3000/yr +employer $1000 they match 1/3 up to 6% wage.  =4000/yr
HSA $1000/ yr + employer 250 +20% up to 1K  =1450/yr


I will have to look in to the refi a little more. I would Really like to drop the $40,000 that is at average 6%

I think I will probably start with paying high interest loans back faster with $1500 extra payment starting April 1st.
the min monthly payments totals is $850/mo for all student loans.
Doing this I should be done with high interest debt in 2.5 years.

After I eliminate,destroy and concur my really high loans what should I start upping for investment?
1) Max HSA first?
2) Max 401k
3) Roth IRA
4) Vangard

That's the generally accepted investment priority here.  Some might do #2 up to max company match, jump to #3, then back to max #2, then onto #4.

It gets more fun when you get to #5.

2Birds1Stone

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Re: Should I?? Pay debt with ROTH IRA??
« Reply #11 on: November 08, 2016, 01:59:07 PM »
Absolutely not, that is $25k that can grow tax free indefinitely.

You would be robbing your future self.

Mother Fussbudget

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Re: Should I?? Pay debt with ROTH IRA??
« Reply #12 on: November 08, 2016, 03:45:17 PM »
'Investment order' - copied from the "Case Study spreadsheet".

Here is the "usual advice", current as of the posting date.  See the 'Investment Order' tab in the case study spreadsheet for the latest version.   
"Max..." means "contribute up to the maximum allowed for..., subject to your ability to pay day-to-day expenses."   
   
It is up to you whether to consider "saving for a house down payment" as a "day to day expense", vs. lumping the down payment savings in with "taxable investments" at the end.   
If you are renting, you may not be throwing away as much on rent as you might think.  See   
   http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/ for some thoughts.
   
In the lists below, thinking "first your 457 (if you have one), then your 401k and/or 403b" wherever "401k" appears is likely correct -   
   unless your 457 fund options are significantly worse than those in the 401k/403b -
   due to penalty-free access to 457 funds at retirement, even if younger than 59 1/2.
   
Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).   
   
Current 10-year Treasury note yield is ~2%.  See   
   http://quotes.wsj.com/bond/BX/TMUBMUSD10Y
   
WHAT   
0. Establish an emergency fund to your satisfaction   
1. Contribute to 401k up to any company match   
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.   
3. Max HSA    
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level   
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)   
6. Fund mega backdoor Roth if applicable   
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.   
8. Invest in a taxable account with any extra.   
   
WHY   
0. Give yourself at least enough buffer to avoid worries about bouncing checks   
1. Company match rates are likely the highest percent return you can get on your money   
2. When the guaranteed return is this high, take it.   
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.   
4. Rule of thumb: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between (or see   
   http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/
   if you want even more details on that topic).  See also
   https://www.bogleheads.org/forum/viewtopic.php?f=2&t=182081,
   http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-overwhelming-student-loan-debt-how-would-you-get-started/msg868845/#msg868845
   and other posts in that thread about exceptions to the rule.
5. See #4 for choice of traditional or Roth for 401k   
6. Applicability depends on the rules for the specific 401k   
7. Again, take the risk-free return if high enough   
8. Because earnings, even if taxed, are beneficial   
   
The emergency fund is your "no risk" money.  You might consider one of these online banks:   
   http://www.magnifymoney.com/blog/earning-interest/best-online-savings-accounts275921001
      
If your 401k options are poor (i.e., high fund fees) you can check   
   http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/
for some thoughts on "how high is too high?"   
   
Priorities above apply when income is primarily through W-2 earnings.  For those running their own businesses (e.g., rental property owner, small business owner, etc.),   
   putting money into that business might come somewhere before, in parallel with, or after step 5.
   
See http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html for some data on historical returns.

Cwadda

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Re: Should I?? Pay debt with ROTH IRA??
« Reply #13 on: November 08, 2016, 04:03:31 PM »
Another vote for not drawing down your Roth. Explore other options first. Try refinancing.