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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: tylerlekang on July 15, 2014, 11:57:36 AM

Title: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: tylerlekang on July 15, 2014, 11:57:36 AM
Hello, I'm 29 years old (turning 30 this year) and I have no debt. My car is paid off and my undergraduate school loans are paid off. I rent an apartment (with a roommate) and I have one credit card. Otherwise, I have no loans.

I am currently unemployed and pursuing my Master's degree in engineering. I've got two more semesters to go on my degree (this fall and the upcoming spring). I estimate that living expenses through May 2015 and the remaining school costs will about around $40,000.


I have two IRA accounts at Vanguard, a traditional and a Roth. The traditional has about $75,000 and  the Roth has about $50,000. Both are in index funds with 0.05% expense ratios.


I can make it through this month (July 2014) but won't have enough money to make it through Aug. Point being, I need to do something this money to get more money.


Some options:

i) withdraw $20,000 from Roth IRA now and another $20,000 from Roth IRA early next year, live off that and pay school costs directly
ii) withdraw a lower amount from Roth IRA and obtain federal loans for school costs
iii) attempt to obtain a personal loan for $40,000
iv) attempt to obtain a personal loan for a lower amount and obtain federal loans for school costs


I know in an ideal, perfect world I'd get loans and leave my IRAs alone, given low interest rates. I know my credit score is "good", but not perfect.

I also know there are a lot of potential traps with personal loans and they can have things like origination fees and variable rates. I've also read that lenders may charge exit fees if you pay back the loan faster than expected, which is something I would not agree with. Then of course there's the hassle of shopping around, waiting to get approved, etc. etc.

The federal loans are nice, on the other hand because you can pay them back at any rate you want without penalty and they're reasonably lower, fixed rates. But I can only take them for the amount of my school costs, not for my living expenses. Unfortunately.




So I'm leaning toward i) or ii). Would greatly appreciate any thoughts or encouragement if you think scenario iii) or iv) is worth the hassle in the long run.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: tylerlekang on July 15, 2014, 02:44:03 PM
37 views and no comments?

I guess the types of advice I'd be especially interested in hearing are:

- "take option ii) over option i), because ..."
- "take out loans and leave your IRA alone, IF you can get loans at a rate below ..."

- anything where someone can show me how to simulate/calculate the numbers in the four different scenarios under reasonable conditions


Thanks!
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: Angie55 on July 15, 2014, 02:55:13 PM
I'm more interested why you are pursuing a Master's degree in engineering. Is engineering not your undergraduate major? Or is it a specialty field of engineering that only exists as Master's such as Fire Protection?

I went for a Master's in mechanical engineering and all it got me was a year of missed wages and a $20,000 loan for tuition. I think I even paid some of the tuition out of pocket on top of the loan! No job that I or my husband have worked in have ever given an edge during hiring or higher salaries due to having a Master's. For an MBA yes. I wish I had just quit after undergraduate but at the time it seemed like a good idea to stay for 8 months to get a Master's. In reality it wasn't.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: seattlecyclone on July 15, 2014, 02:58:54 PM
Are those four options that you listed really the only ways to go? Could you possibly sell your car and use public transit in order to both cut costs and reduce the need for loans? Could you find a part-time job to cover your living expenses and use student loans to pay the tuition?

I would probably favor federal student loans over personal loans because the student loans offer a bit more flexibility in monthly payments if you have difficulty finding employment after you graduate.

Once you take money out of your Roth IRA, it can't go back in, so I would probably do that only as a last resort. Taking money out of your Roth at an early age would really cripple your long-term investment potential. If the personal loan's interest and fees were high enough, I may hold my nose and go with the Roth withdrawal anyway. I'd really encourage you to find a job (any job) before you take money out of the Roth.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: shotgunwilly on July 15, 2014, 03:04:21 PM
I'm more interested why you are pursuing a Master's degree in engineering. Is engineering not your undergraduate major? Or is it a specialty field of engineering that only exists as Master's such as Fire Protection?

I went for a Master's in mechanical engineering and all it got me was a year of missed wages and a $20,000 loan for tuition. I think I even paid some of the tuition out of pocket on top of the loan! No job that I or my husband have worked in have ever given an edge during hiring or higher salaries due to having a Master's. For an MBA yes. I wish I had just quit after undergraduate but at the time it seemed like a good idea to stay for 8 months to get a Master's. In reality it wasn't.

Mechanical Engineer here, and having recently viewed tons of job listings, I do see alot of opportunities that say "B.S in Engineering plus 5 years experience required, or Masters plus 2." or some variation of this.  So it seems it could help in certain fields.  I cannot 100% confirm because I do not have a masters...

As for your options, I believe I would attempt option 2 if it were me.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: welliamwallace on July 15, 2014, 03:04:31 PM
It depends on the available interest rates of the loans. If I could get any loans for less than 4%, I would do that instead of withdrawing from my IRA. If my loans were going to be above 5%, I would withdraw from my IRA. Not sure about the middle ground.

However, I also would look at alternatives: Working part time while at school, or even better, getting a normal engineering job now with a company that will pay for your Masters Degree. Tons will do this.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: Eric on July 15, 2014, 03:15:56 PM
Is option 1 really an option?  You can't withdrawal any Roth gains without paying a 10% penalty, only contributions are eligible for penalty-free withdrawal.  You've had $40,000 (or more) worth of contributions but only $10,000 (or less) worth of gains?
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: boarder42 on July 15, 2014, 03:22:36 PM
yeah why masters in engineering.  you can get a baller job without one.  a masters isnt really needed and doesnt gain you what it costs you to get. 2 more years and apparently 80k more in money.  shoot.  while you've been getting that masters you could have made 160k for a gross gain of 240k.  now you make 90k and are 240k behind.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: okashira on July 15, 2014, 03:34:03 PM
Hello, I'm 29 years old (turning 30 this year) and I have no debt. My car is paid off and my undergraduate school loans are paid off. I rent an apartment (with a roommate) and I have one credit card. Otherwise, I have no loans.

I am currently unemployed and pursuing my Master's degree in engineering. I've got two more semesters to go on my degree (this fall and the upcoming spring). I estimate that living expenses through May 2015 and the remaining school costs will about around $40,000.


I have two IRA accounts at Vanguard, a traditional and a Roth. The traditional has about $75,000 and  the Roth has about $50,000. Both are in index funds with 0.05% expense ratios.


I can make it through this month (July 2014) but won't have enough money to make it through Aug. Point being, I need to do something this money to get more money.


Some options:

i) withdraw $20,000 from Roth IRA now and another $20,000 from Roth IRA early next year, live off that and pay school costs directly
ii) withdraw a lower amount from Roth IRA and obtain federal loans for school costs
iii) attempt to obtain a personal loan for $40,000
iv) attempt to obtain a personal loan for a lower amount and obtain federal loans for school costs


I know in an ideal, perfect world I'd get loans and leave my IRAs alone, given low interest rates. I know my credit score is "good", but not perfect.

I also know there are a lot of potential traps with personal loans and they can have things like origination fees and variable rates. I've also read that lenders may charge exit fees if you pay back the loan faster than expected, which is something I would not agree with. Then of course there's the hassle of shopping around, waiting to get approved, etc. etc.

The federal loans are nice, on the other hand because you can pay them back at any rate you want without penalty and they're reasonably lower, fixed rates. But I can only take them for the amount of my school costs, not for my living expenses. Unfortunately.




So I'm leaning toward i) or ii). Would greatly appreciate any thoughts or encouragement if you think scenario iii) or iv) is worth the hassle in the long run.

Why is a single year of a engineering masters going to cost you $40,000?
When I was evaluating a mechanical engineering masters or PhD, I was offered to be paid for the pleasure in either case, including housing.

That was only three years ago, and the economy hasn't exactly gotten worse...
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: FastStache on July 15, 2014, 05:55:09 PM
From what I've seen around my job getting a Masters is a huge plus espcially if you can do it in a year and under 20K. It usually allows you come in a higher position for entry level folks. Plus, it makes it easier for future promotions. The salary difference can be 10K plus at year 1, and most places given % based increases.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: tylerlekang on July 15, 2014, 06:58:09 PM
I'm more interested why you are pursuing a Master's degree in engineering. Is engineering not your undergraduate major? Or is it a specialty field of engineering that only exists as Master's such as Fire Protection?

I went for a Master's in mechanical engineering and all it got me was a year of missed wages and a $20,000 loan for tuition. I think I even paid some of the tuition out of pocket on top of the loan! No job that I or my husband have worked in have ever given an edge during hiring or higher salaries due to having a Master's. For an MBA yes. I wish I had just quit after undergraduate but at the time it seemed like a good idea to stay for 8 months to get a Master's. In reality it wasn't.

I do have a B.S. in electrical engineering and no, the M.S. degree I'm pursuing is not for any specialty field or career track.

I moved to Minneapolis immediately after graduating with my B.S. that May and began working at a large company in what I would call a support role (to those in engineering/manufacturing, you'll know what I mean - supplier quality). At that time I only cared about getting to Minneapolis with a job in hand.

After a year or so, I realized that was not the type of engineering career track that I wanted. I applied to the graduate program for EE at the University of Minnesota, a much more prestigious school for engineering (as far as midwest, public universities go).

The idea was that by earning a M.S. from one of the better Big Ten universities, it would greatly increase my chances of being able to land the type of engineering job that I ultimately want as my career for the next 30+ years: new product designer or R&D (rather than support roles).

I was accepted and planned to quit my job, starting full time that fall, but I was talked into staying with the company for two reasons: 1) the top benefit of this company was a very generous 401k match, but the money would not become "mine" until I worked there for five years (thus I'd be throwing this away if I quit early) and 2) the company would actually pay for my master's degree while I continued to work there.

This sounded like a great plan, so I enrolled part-time at the U and continued to work full time for the company. I was only able to make it through two semesters (taking just one class in each) before I burned out. I promised myself that once I hit the five year mark with the company I would quit and finish what I had started as a full time student.

I ended up working for the company five and a half years, quitting early this year. I completed two classes in the spring semester and I believe I can complete three this fall and three more in the spring, which would complete my degree requirement.


It never really occurred to me that I could attempt to land such a design or R&D position at another company using my existing B.S. credentials.

In hindsight, I'm certain that doing so would have ultimately been a better use of my time and money back when I applied at the U. But I didn't believe in myself, or perhaps that was just an excuse to enable me to select the graduate school path. And when I recently now just quit my job, rather than trying to land such a job elsewhere I had already made up my mind to "finish what I started" rather than leave it unfinished.


So in the end, quitting the M.S. pursuit and just looking for my desired career with my existing B.S. credentials is not on the table, for me. Even if it ends up getting me a job that I could well have gotten without it, wastes a bunch of money, missed wages and experience time - I'm going to get this M.S. and then take it from there.

And besides, I'm not in it to maximize my wages. It's more important to me that I get the engineering career/position that I want (or that I think I want). I do believe getting the M.S. will give me a (slightly) better chance at obtaining it.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: tylerlekang on July 15, 2014, 07:13:58 PM
Are those four options that you listed really the only ways to go? Could you possibly sell your car and use public transit in order to both cut costs and reduce the need for loans? Could you find a part-time job to cover your living expenses and use student loans to pay the tuition?

I would probably favor federal student loans over personal loans because the student loans offer a bit more flexibility in monthly payments if you have difficulty finding employment after you graduate.

Once you take money out of your Roth IRA, it can't go back in, so I would probably do that only as a last resort. Taking money out of your Roth at an early age would really cripple your long-term investment potential. If the personal loan's interest and fees were high enough, I may hold my nose and go with the Roth withdrawal anyway. I'd really encourage you to find a job (any job) before you take money out of the Roth.

I'm not interested in a part time job or selling my car, though I am going to utilize public transit more to save on gas expenses.

Just want to focus on finishing the M.S. and move on with my life.


If it were possible to take out a federal loan that included money for my living expenses, I would strongly consider that. But as far as I know they will only disburse them to the school for the line items on your school account (tuition, books, fees, etc.).
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: tylerlekang on July 15, 2014, 07:16:52 PM
It depends on the available interest rates of the loans. If I could get any loans for less than 4%, I would do that instead of withdrawing from my IRA. If my loans were going to be above 5%, I would withdraw from my IRA. Not sure about the middle ground.

However, I also would look at alternatives: Working part time while at school, or even better, getting a normal engineering job now with a company that will pay for your Masters Degree. Tons will do this.

Thanks for the advice on the first comment! I have no idea what kind of personal loan rates and T&C's I could qualify for.

My ideal (perfect) loan would be:

- $40k
- 4% or less
- no penalty for over payments or early payment of loan
- no other fees (origination or whatever)

Guessing such a thing is not in the cards for me without a perfect credit score and a long-standing relationship with a lender.


For your second comment, see previous posts.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: tylerlekang on July 15, 2014, 07:20:02 PM
Is option 1 really an option?  You can't withdrawal any Roth gains without paying a 10% penalty, only contributions are eligible for penalty-free withdrawal.  You've had $40,000 (or more) worth of contributions but only $10,000 (or less) worth of gains?

Yes, this is a point that can't be ignored.

When I rolled over a while ago, they told me my contributions were in the 30's. So that might be a good reason to avoid option i) vs. option ii). Though if I'm going to (almost) cash out my Roth IRA, I don't really want to then have debt at the end of the day (even if it's only a federal loan).

The way I could look at is, my Roth IRA was all money that I put in after taxes, right out of my paycheck before it was ever deposited in my checking account. It was like a savings account for a rainy day and now it's raining.

True, that's a poor attitude and the money could grow well and serve me better in retirement. But I'm just exploring options in this thread, I haven't decided anything yet.

Appreciate all responses, criticisms and points!
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: tylerlekang on July 15, 2014, 07:23:53 PM
Why is a single year of a engineering masters going to cost you $40,000?
When I was evaluating a mechanical engineering masters or PhD, I was offered to be paid for the pleasure in either case, including housing.

That was only three years ago, and the economy hasn't exactly gotten worse...

This isn't an option for me at the U. Don't get me wrong, grad students do get funded ... if they're PhD candidates working for/with a professor. Not so much otherwise.

And while I'm probably a stronger student than some of the PhD candidates in the department, classwork doesn't really mean anything to them. It's 100% about research and being published. That's the name of the game. So those without such ambitions might as well be undergrad students.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: tylerlekang on July 16, 2014, 11:31:06 AM
Thank you to everyone who replied! Really appreciate any advice, criticism or questions.

I guess it mainly boils down to this: would it be reasonable trying to obtain a personal loan with the following conditions?

- less than 4% interest rate
- no penalty/fee on overpayments or early completion of loan repayment

- ideally no origination/activation fee or any other fees, but more flexible on this one within reason

- at least $10k, but preferrably $20k up to $40k

- don't care about the term IF it can be paid back at any rate without penalty

Thanks!
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: boarder42 on July 16, 2014, 02:09:17 PM
still dont see the need for a master esp. as an EE. most EEs i know including myself make piles with BS degrees.  my work will pay for my masters... i always wanted an MBA ... but is it really worth my time since i will be retiring in 8 years.  probably not.  may as well live my life in the fast lane and enjoy the small things and then retire.  Though MBA with finance emphasis could come in handy in retirement. 
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: tylerlekang on July 16, 2014, 02:14:01 PM
still dont see the need for a master esp. as an EE. most EEs i know including myself make piles with BS degrees.  my work will pay for my masters... i always wanted an MBA ... but is it really worth my time since i will be retiring in 8 years.  probably not.  may as well live my life in the fast lane and enjoy the small things and then retire.  Though MBA with finance emphasis could come in handy in retirement.

Fully understand your sentiment. I tried to do it while working, and couldn't make it. And I'm not going to quit now, even if I don't need it.

Thus why I'm looking for advice on if I should take a personal loan or take the money out of my Roth IRA.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: seattlecyclone on July 16, 2014, 02:23:47 PM
And I'm not going to quit now, even if I don't need it.

Why? The time and money you've already put into the degree is a sunk cost. If you have strong reasons to believe that paying $40k to complete your degree is going to pay off by leading to a better job than you can get with your current degree and work experience, or that it will somehow otherwise enhance the quality of your life, by all means go ahead and do it. But if you truly don't need it, don't do it!
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: tylerlekang on July 16, 2014, 02:33:45 PM
And I'm not going to quit now, even if I don't need it.

Why? The time and money you've already put into the degree is a sunk cost. If you have strong reasons to believe that paying $40k to complete your degree is going to pay off by leading to a better job than you can get with your current degree and work experience, or that it will somehow otherwise enhance the quality of your life, by all means go ahead and do it. But if you truly don't need it, don't do it!

I can't say with certainty that it will get the job I want, but I do think it will help and at this point I don't want to leave it unfinished.

I'm going to complete it. Now I'm just looking for advice on the best way to pay for it.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: Gin1984 on July 16, 2014, 02:49:17 PM
Have you earned any money as of now?  You can take out the cost of your tuition from your traditional (and pay no taxes if you are not earning anything and pull less than your standard deduction and personal exception).  Student loans for this year are pretty bad for grad students, 6.21%, just fyi.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: tylerlekang on July 16, 2014, 02:51:30 PM
The best way to pay for it is to follow okashira's advice.  Find a prof to cover it for you by working as a GRA or TA.  Coursework only MS are eh, so you could possibly save some coursework by parlaying your GRA work to a master's thesis. 

If you actually want advice about how to find a prof to work with, feel free to PM me.  I won't waste the time of the forum readers.

Even if I could get a half time appointment as a teaching assistant (impossible, I already tried and there were three times as many applicants as there were positions - basically, they only go to Prof's PhD students) or as a research assistant (obviously the Prof is mostly going to hire his own PhD students) - that would only give me a tuition waiver and (almost) free health care, from what I've read. Perhaps there's more money with it than that, but my point is that I still believe I would need money for living expenses.

So that said, what's the best way to cover that? I'm not going to get a job, I'm not going to sell stuff, I'm out of money. It's either get a loan or withdraw from my Roth IRA.


As far as your other comment, I'm not interested in a career in academic research. If that were the case, I would be pursuing a PhD now. I frankly don't understand why someone would write a Master's thesis for any reason other than using it as a stepping stone to getting noticed and accepted into a PhD candidate position.

Hence why I'm basically just doing some extra coursework to get a Master's, with the hope that this extra credential (from a better school) will assist me in my pursuit of the career track I desire.


(In my opinion a Master's should be just for those doing exactly what I'm doing - extra coursework in advanced courses. If your aim is to write a thesis, you should be in the PhD track automatically.)
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: tylerlekang on July 16, 2014, 02:54:09 PM
Have you earned any money as of now?  You can take out the cost of your tuition from your traditional (and pay no taxes if you are not earning anything and pull less than your standard deduction and personal exception).  Student loans for this year are pretty bad for grad students, 6.21%, just fyi.

I know this is a possibility, but it only works for "qualified education expenses". I have living expenses to cover as well.

If your argument is that I could take school expenses from the traditional rather than both school and living from the Roth, that is a valid point. But at this point I'm more apt to just take the Roth money and not have the potential headache come tax season.


That loan rate does not look good, for a federal student loan! All the more reason that I feel like it would be a waste of time to pursue a personal loan at less than 4%.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: 4alpacas on July 16, 2014, 03:04:24 PM
Since you're so opposed to research, I would recommend loans.  I wouldn't rob your Roth IRA for one year.  In theory, you'll land a high paying job straight out of graduate school and pay back the loans quickly by keeping the student lifestyle. 
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: Gin1984 on July 16, 2014, 03:08:09 PM
Have you earned any money as of now?  You can take out the cost of your tuition from your traditional (and pay no taxes if you are not earning anything and pull less than your standard deduction and personal exception).  Student loans for this year are pretty bad for grad students, 6.21%, just fyi.

I know this is a possibility, but it only works for "qualified education expenses". I have living expenses to cover as well.

If your argument is that I could take school expenses from the traditional rather than both school and living from the Roth, that is a valid point. But at this point I'm more apt to just take the Roth money and not have the potential headache come tax season.


That loan rate does not look good, for a federal student loan! All the more reason that I feel like it would be a waste of time to pursue a personal loan at less than 4%.
What headache do you think you would have?
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: lhamo on July 16, 2014, 03:14:20 PM
My ideal (perfect) loan would be:

- $40k
- 4% or less
- no penalty for over payments or early payment of loan
- no other fees (origination or whatever)

Guessing such a thing is not in the cards for me without a perfect credit score and a long-standing relationship with a lender.


Do you have evidence that this even exists?  If it did, why wouldn't everyone be trying this rather than taking out student loans at 6%+ 

I'd figure out what is REALLY available to you rather than assuming a pretty financial unicorn is going to come strolling your way and let you bring it home with you.  Then make your decision based on the actual facts, rather than some imagined hypothesis.

And no offense, but you really sound like you need a bit of an attitude adjustment.  You come across as very negative/rigid/burned out. 
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: marblejane on July 16, 2014, 03:19:53 PM
Have you even looked into student loans? At my master's program, the financial aid office set an "estimated cost of attendance" that includes tuition, fees & a budget for living expenses. You are allowed to borrow up to the amount of this estimated cost of attendance in federal loans.

If your prior year tax return shows that you haven't been working at all, you may qualify for a Perkins loan (interest does not capitalize while you are still in school, lower interest rate).
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: snuggler on July 16, 2014, 04:06:19 PM
Are those four options that you listed really the only ways to go? Could you possibly sell your car and use public transit in order to both cut costs and reduce the need for loans? Could you find a part-time job to cover your living expenses and use student loans to pay the tuition?

I would probably favor federal student loans over personal loans because the student loans offer a bit more flexibility in monthly payments if you have difficulty finding employment after you graduate.

Once you take money out of your Roth IRA, it can't go back in, so I would probably do that only as a last resort. Taking money out of your Roth at an early age would really cripple your long-term investment potential. If the personal loan's interest and fees were high enough, I may hold my nose and go with the Roth withdrawal anyway. I'd really encourage you to find a job (any job) before you take money out of the Roth.

I'm not interested in a part time job or selling my car, though I am going to utilize public transit more to save on gas expenses.

Just want to focus on finishing the M.S. and move on with my life.


If it were possible to take out a federal loan that included money for my living expenses, I would strongly consider that. But as far as I know they will only disburse them to the school for the line items on your school account (tuition, books, fees, etc.).

Have you spoken with your school's financial aid office? I am almost 100% positive that my graduate school loans covered a living expenses allowance.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: Frugal Father on July 16, 2014, 04:18:24 PM
Ditto to the two above me. My financial aid definitely allowed for estimated living expenses. Look into it before you go down any other road.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: tylerlekang on July 16, 2014, 10:39:04 PM

What headache do you think you would have?

It may not be much of a headache. I've just never taken a withdrawal from an IRA before, so I don't know how hard it is to deal with the taxes the next spring.

In theory ...  I should be able to take a withdrawal from my traditional IRA or from the earnings on my Roth IRA as an exception to a non-qualified distribution because I'd be using it for qualifying education expenses.

But would I get audited by the IRS if I turn in a W2 that shows no income at all, after five years of 1040EZ forms showing full income? Does Vanguard automatically tip the IRS off that I took what appears to be a non-qualifying distribution and then leave it to me to explain things?


So, it would be simpler to just withdraw from my contributions in the Roth IRA. No mess there.


I guess that's all I'm getting at.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: tylerlekang on July 16, 2014, 10:43:18 PM

Do you have evidence that this even exists?  If it did, why wouldn't everyone be trying this rather than taking out student loans at 6%+ 

I'd figure out what is REALLY available to you rather than assuming a pretty financial unicorn is going to come strolling your way and let you bring it home with you.  Then make your decision based on the actual facts, rather than some imagined hypothesis.

And no offense, but you really sound like you need a bit of an attitude adjustment.  You come across as very negative/rigid/burned out.

Well first of all, federal loans are different for graduate and professional students than for undergrad students. Here is the link: https://studentaid.ed.gov/about/announcements/interest-rate

So that obviously does not bode well for obtaining a personal loan at a rate less than 4%. Do I have evidence that it is even possible -- no, actually. None.

That's why I was posting on this message board! I was hoping a knowledgable person might happen to read the thread and say "oh no, you'll never get a personal loan at that low of a rate, even with perfect credit" -OR- "yes you should apply at ____ credit union, you have a chance to get a rate that low". Something like that.

But so far, that has not happened...
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: tylerlekang on July 16, 2014, 10:49:01 PM
Have you even looked into student loans? At my master's program, the financial aid office set an "estimated cost of attendance" that includes tuition, fees & a budget for living expenses. You are allowed to borrow up to the amount of this estimated cost of attendance in federal loans.

If your prior year tax return shows that you haven't been working at all, you may qualify for a Perkins loan (interest does not capitalize while you are still in school, lower interest rate).

As far as I know, I will never qualify for anything "good" from the feds because I'm a grad student. Not even a subsidized loan.

Just the direct unsubsidized or the direct PLUS, which are above 6% and 7% respectively.


So even if I could take a $20k loan in the fall and a $20k loan in the spring, fully covering my costs via federal loans - even the 6.21% rate apparently means that I'd be better off in the long run just withdrawing the money from my IRA. (going off the reply saying he would do the withdrawal at higher than 5% rate)

Keep in mind that my IRA money is in very low cost index funds, so I doubt the return is greater than 5% a year.


And that also ignores the fact that I need money by the start of August too! I probably couldn't get the money from the feds until Sept.


But thank you very much for the suggestion!
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: tylerlekang on July 16, 2014, 10:54:54 PM
If I may make one last attempt to solicit specific advice from the knowledgeable posters who read this forum.

Is there any easy way for me to run a simple simulation of the four scenarios, using simple variables and assumptions. I'm thinking going from age 30 to 60 in the four different paths and seeing how much variation there is in the long run.

I just don't know what the formulas are to say that if I start off with an IRA at X and it goes for 30 years vs. taking money out vs. paying back a loan, etc.

I'd love to "run the numbers" on all the scenarios, I just don't know how!
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: lhamo on July 16, 2014, 11:09:30 PM
That's why I was posting on this message board! I was hoping a knowledgable person might happen to read the thread and say "oh no, you'll never get a personal loan at that low of a rate, even with perfect credit" -OR- "yes you should apply at ____ credit union, you have a chance to get a rate that low". Something like that.

But so far, that has not happened...

I think you are a bit na´ve to think that there is some kind of critical mass of people from Minnesota who have taken out personal loans for school expenses active in these forums.

Google is your friend -- a quick search of "credit union personal loan rates Minnesota" returns several possibilities.  I'll even post the link to the search here to make it easy for you:

https://www.google.com/?gws_rd=ssl#newwindow=1&q=credit+union+personal+loan+rates+minnesota

The first link below the paid sponsored links lists the rate as 4.25 + prime.  Would hazard a guess that other credit unions are going to be very close to that rate -- market conditions are the same.

https://www.rcu.org/loans/personal_loans.phtml

Again, would suggest an attitude adjustment.  You are really putting out negative/hostile vibes.  Maybe you are very nice and personable in person, but on-line communication skills are also important.  You can buckle down and get this degree under your belt if that is what you are determined to do, but in the end you need to find another job, and that will depend as much (if not more) on how you interact with people as what you learn in school. 

Good luck making your decision and with finishing up your degree and finding more satisfying employment.

Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: frugaliknowit on July 17, 2014, 04:52:56 AM
I'm going to give you some "tough love" as opposed to the answer you want to hear:

1.  Get a job.  Promote the fact that you are 2 semesters away from your master's in your job campaign.

2.  When you get a job, do your 2 semesters (will probably take you 4 or 5...?) via employer sponsorship or out of pocket.

Personal loan or IRA to fund advanced degree, are you kidding me?  Punch yourself in the face!  There's no guarantee that it will payoff financially, so don't touch your retirement stache or borrow money!  Ok, now here's a hug, sorry if I'm being harsh, just honest....
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: tylerlekang on July 17, 2014, 10:23:54 AM
No, I'm not going to get a job (or sell my car or anything else). I've already said that, multiple times. I don't need to do that. I want to focus 100% of my energy and time on doing well in school and that's what I'm going to do.


My financial aid notice came in this morning from the U. They'll offer $30k for the year, 2/3 from Direct Unsubsidized and 1/3 from Direct Grad PLUS.

The former is 6.21% with a >1% origination fee and the latter is 7.21% with a >4% origination fee.

Couple that with the 4.25% + Prime (equals 7.5%) rate that lhamo found, which I assume is going to be normal (or better than normal) rate for a personal loan, and that pretty much answers my question that loans are going to be a waste of my time and in the long run will actually cost me more than the losses I'll realize from taking money out of the IRA. At least, that going by what the poster before said about doing the withdraw at greater than 5% rate. Which makes sense because I doubt my IRA are growing by more than 5% annually.


Of course I'd love to be able to "run the numbers" on a simulation from year 30 to year 60 in all cases, but that seems to have gone on deaf ears (or eyes, as it were). I've asked for that repeatedly and no one will respond to that request.


Thank you all for the responses, even if they were not what I wanted to hear. I appreciate everyone who took the time to respond to the thread!
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: rmendpara on July 17, 2014, 10:30:09 AM
Thank you to everyone who replied! Really appreciate any advice, criticism or questions.

I guess it mainly boils down to this: would it be reasonable trying to obtain a personal loan with the following conditions?

- less than 4% interest rate
- no penalty/fee on overpayments or early completion of loan repayment

- ideally no origination/activation fee or any other fees, but more flexible on this one within reason

- at least $10k, but preferrably $20k up to $40k

- don't care about the term IF it can be paid back at any rate without penalty

Thanks!

A personal loan under 4%? No way, Jose.

Even federal student loans are at 6.5% last I checked.

Keep in mind that any IRA loan will cost you the stated rate + lost earnings, so it's really like taking a floating interest rate loan.

Your loan from the IRA will remove the dollars from investments in the IRA, which you have to pay back later, so you don't get any earnings from that on top of paying a low rate (depends on your IRA manager).

If the stated rate is 4%, and historical balanced stock index portfolios are anywhere from 6-8%, then the total amount that you "give up" by taking a IRA loan is going to be anywhere from 10% to 12%... and maybe even higher if the market goes forward.

I applaud you for trying to graduate debt free, but in this case, you're probably better off (from a net worth perspective) to take on the debt and then pay it off within a few years of work.

Consider a student loan stated fixed rate of 6.5% against an implicit IRA rate of 10%+... and the decision becomes easy.

Am I missing something?
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: Angie55 on July 17, 2014, 10:34:27 AM
You're getting a Master's degree in engineering. You are more than competent to run the numbers YOURSELF. Of course, everyone here would be happy to check them to see if they make sense.

In fact, here is a strickingly similar thread that was posted maybe a day or two before yours.
http://forum.mrmoneymustache.com/ask-a-mustachian/beating-a-dead-horse-cask-out-401k/msg341676/#msg341676
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: tylerlekang on July 17, 2014, 10:39:53 AM
A personal loan under 4%? No way, Jose.

Even federal student loans are at 6.5% last I checked.

Keep in mind that any IRA loan will cost you the stated rate + lost earnings, so it's really like taking a floating interest rate loan.

Your loan from the IRA will remove the dollars from investments in the IRA, which you have to pay back later, so you don't get any earnings from that on top of paying a low rate (depends on your IRA manager).

If the stated rate is 4%, and historical balanced stock index portfolios are anywhere from 6-8%, then the total amount that you "give up" by taking a IRA loan is going to be anywhere from 10% to 12%... and maybe even higher if the market goes forward.

I applaud you for trying to graduate debt free, but in this case, you're probably better off (from a net worth perspective) to take on the debt and then pay it off within a few years of work.

Consider a student loan stated fixed rate of 6.5% against an implicit IRA rate of 10%+... and the decision becomes easy.

Am I missing something?

Thank you for the post! No offense to the previous posters, but this is the most helpful post I've received so far.

Could you help me understand what you mean by implicit rate?


Here are two scenarios I'd like to try to understand better.

- Take a 40k loan at 7%, aggressively pay it back in 5 years

- Remove 40k from a Roth IRA that has 50k (I can keep my lowest cost index fund shares with a minimum balance of 10k), assume whatever the standard return is for index funds, contribute 10k back into the IRA each year for four years
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: tylerlekang on July 17, 2014, 10:42:52 AM
You're getting a Master's degree in engineering. You are more than competent to run the numbers YOURSELF. Of course, everyone here would be happy to check them to see if they make sense.

In fact, here is a strickingly similar thread that was posted maybe a day or two before yours.
http://forum.mrmoneymustache.com/ask-a-mustachian/beating-a-dead-horse-cask-out-401k/msg341676/#msg341676

I read that thread before posting, believe it or not. I don't agree that it's a similar situation, nor am I willing to use credit card hopping as a viable means of paying my expenses.


Yes, obviously I'm capable of running the numbers ... if I knew how! That's like saying "hey man, you own tools ... you should be able to figure out how to install that water heater yourself!"
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: Angie55 on July 17, 2014, 10:49:05 AM
40k student loan on 5 year payoff at 6.5% you will pay 46958.75 total. You will also be able to contribute to your Roth during this payback time if you have extra money.

Leaving 40k in your Roth (the 10k is just extra and does not come into play in any calculations) for 5 years with a conservative 6% return. It will be worth approximately 50499 at the end of 5 years.

You can only contribute 5500 to a Roth IRA per year. So don't expect to add in 10k per year after you receive your new job.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: tylerlekang on July 17, 2014, 10:54:40 AM
What the heck is the point of a Roth IRA then???

It's all your own money that you're putting in (after-tax money).


Why wouldn't I just put that money into directly buying shares of the index fund that my Roth IRA money is in now? Then I could take out the contributions and the earnings any time I want (by selling the shares).
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: Angie55 on July 17, 2014, 10:57:07 AM
The gains in a Roth IRA are tax free. At retirement, or utilizing a 72t, you can withdraw any earnings without paying taxes.

Alternatively, if your money was in a brokerage account you would pay capital gains tax of 0-15% when you withdraw or realize any earnings.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: Cpa Cat on July 17, 2014, 11:01:13 AM
Max out Federal loans and reduce your living expenses to the bare minimum. Roommates, ramen, public transportation, part time job as a TA/research assistant/whatever.

The market is doing too well right now to take money out of your retirement. The long-term cost of every dollar you remove is very high right now. Do whatever you can to not touch that money.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: rmendpara on July 17, 2014, 11:06:49 AM
A personal loan under 4%? No way, Jose.

Even federal student loans are at 6.5% last I checked.

Keep in mind that any IRA loan will cost you the stated rate + lost earnings, so it's really like taking a floating interest rate loan.

Your loan from the IRA will remove the dollars from investments in the IRA, which you have to pay back later, so you don't get any earnings from that on top of paying a low rate (depends on your IRA manager).

If the stated rate is 4%, and historical balanced stock index portfolios are anywhere from 6-8%, then the total amount that you "give up" by taking a IRA loan is going to be anywhere from 10% to 12%... and maybe even higher if the market goes forward.

I applaud you for trying to graduate debt free, but in this case, you're probably better off (from a net worth perspective) to take on the debt and then pay it off within a few years of work.

Consider a student loan stated fixed rate of 6.5% against an implicit IRA rate of 10%+... and the decision becomes easy.

Am I missing something?

Thank you for the post! No offense to the previous posters, but this is the most helpful post I've received so far.

Could you help me understand what you mean by implicit rate?


Here are two scenarios I'd like to try to understand better.

- Take a 40k loan at 7%, aggressively pay it back in 5 years

- Remove 40k from a Roth IRA that has 50k (I can keep my lowest cost index fund shares with a minimum balance of 10k), assume whatever the standard return is for index funds, contribute 10k back into the IRA each year for four years

Take 40k loan @ 7%, pay back in 5 years:
Earnings: $50k Roth @ 8% annual earnings for 5 years (no new contributions) = 50 * 1.08^5 = $73k

Total interest paid: I'll use a mortgage calculator, $40k loan, 7% interest rate. Total Interest paid is $7.5k

http://www.mortgagecalculator.org/

Net change = earnings - cost = 23k - 7.5k = 15.5k ish
Costs: $40k loan

Ending Net Worth = $73 - 7.5 = 66.5k

Remove 40k from ROTH IRA:
Let's assume your IRA manager has a stated rate of 4%. Your new IRA balance on 8/1/14 becomes $10,000

Earnings: 10k Roth @ 8% annual earnings for 5 years = 1.08^5 * 10k = $15k
Then, at the end of each year you pay back $10k, which then starts "earning" again. Here is the value of these payments at the end of the 5th year.
Y1 payment: 1.08^4 * 10k = $13.6k
Y2 payment: 1.08^3... = $12.6k
Y3 payment: 1.08^2... = $11.6k
Y4 payment: $10k (paid on last day)

Total interest paid for IRA loan: $4.1k, $40k loan @ 4%
http://www.mortgagecalculator.org/

Ending value: 15 + 13.6 + 12.6 + 11.6 + 10 - 4.1 = $58.7k

Some of these are going to be off, as they aren't exactly precise... but you get the idea.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: tylerlekang on July 17, 2014, 11:15:01 AM
Ok.

Let's see if this is really possible.


They'll give me the max I can get for Direct Unsubsidized, which is $20,500. With a 1.073% origination fee, that means I'm borrowing 20.5k but only actually getting about 20.28k. Regardless, that is enough to cover me on the school costs.

That has a rate of 6.21%. I would pay off the interest that accrues during school, so that doesn't get added to the 20.5k.


But I still need money for living expenses.

Is the 0% credit card hopping thing really viable? I have good credit (now..). I always get offers for cards thrown at me. But I don't think I could get a big enough line of credit.

I think it'd be between 20k and 25k by the end of next May! Don't think any CC companies are going to give me that. Plus, I'd have to start paying it off at some point and the interest rate will be very high!
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: FrugalSpendthrift on July 17, 2014, 11:16:59 AM
What the heck is the point of a Roth IRA then???

It's all your own money that you're putting in (after-tax money).


Why wouldn't I just put that money into directly buying shares of the index fund that my Roth IRA money is in now? Then I could take out the contributions and the earnings any time I want (by selling the shares).
The point of the Roth IRA is to save for retirement, not for school expenses.  It is also extremely valuable if you use it long term.  Over the short term it would be much easier for you to liquidate your retirement savings to pay for school, but over the long term you would be much better off taking a higher rate loan for school, paying that back quickly to minimize the interest cost, letting the ROTH money grow and continue funding that account.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: tylerlekang on July 17, 2014, 11:21:14 AM
The point of the Roth IRA is to save for retirement, not for school expenses.  It is also extremely valuable if you use it long term.  Over the short term it would be much easier for you to liquidate your retirement savings to pay for school, but over the long term you would be much better off taking a higher rate loan for school, paying that back quickly to minimize the interest cost, letting the ROTH money grow and continue funding that account.

No that's not what I was asking.

What I mean is to consider the two scenarios below:

a) Take 50k in contributions over to Vanguard and put it into their low cost index fund shares. You can take your 50k in and out at any time with no penalty or taxes. But if you try to take out the earnings before 59.5, you're penalized.

b) Purchase 50k of those same low cost index fund shares directly (via some means, I don't know exactly how). Then you can take the 50k and the earnings out at any time you want with no penalty (other than buy/sell commissions, I suppose).


How is there any advantage in a over b? That's what I was asking. Sorry - it's a bit of a tangent to the discussion.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: Cpa Cat on July 17, 2014, 11:26:17 AM
Quote
They'll give me the max I can get for Direct Unsubsidized, which is $20,500. With a 1.073% origination fee, that means I'm borrowing 20.5k but only actually getting about 20.28k. Regardless, that is enough to cover me on the school costs.

That has a rate of 6.21%. I would pay off the interest that accrues during school, so that doesn't get added to the 20.5k.

Don't. You would essentially be borrowing money in order to pay off that interest. Not worth it. Let it ride and pay it off when you have a job. Remember, it's also tax deductible, reducing the interest cost in real terms.


Quote
But I still need money for living expenses.

Is the 0% credit card hopping thing really viable? I have good credit (now..). I always get offers for cards thrown at me. But I don't think I could get a big enough line of credit.

I think it'd be between 20k and 25k by the end of next May! Don't think any CC companies are going to give me that. Plus, I'd have to start paying it off at some point and the interest rate will be very high!

Cut your costs. That's a fair amount of living expenses for less than a year. When you're borrowing money to live, you need to chop down to the minimum. Your car isn't paid off anymore if you're borrowing money for insurance, taxes and gas. You'll be paying (probably) a 10% debt-tax on every morsel you put in your mouth, every phone call you make, every movie you watch.

See if you can get any line of credit for less than 10%. If you can, then take it. If not, then you know your options - borrow against your retirement. But know that with the market going well, your debt-tax rises by the amount of foregone gains + compounding.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: Cpa Cat on July 17, 2014, 11:31:32 AM
No that's not what I was asking.

What I mean is to consider the two scenarios below:

a) Take 50k in contributions over to Vanguard and put it into their low cost index fund shares. You can take your 50k in and out at any time with no penalty or taxes. But if you try to take out the earnings before 59.5, you're penalized.

At 59.5, your 50k is with 200k and you take it out tax free. $150k in earnings with no tax.

Quote
b) Purchase 50k of those same low cost index fund shares directly (via some means, I don't know exactly how). Then you can take the 50k and the earnings out at any time you want with no penalty (other than buy/sell commissions, I suppose).

At 59.5 your 50k is worth 200k. You take it out and pay capital gains on 150k. [Actually, realistically, you've paid tax on interest/dividends all along, so you pay cap gains on slightly less than 150k, but for the sake of simplicity...]. If you take earnings out prior to 59.5, you still pay capital gains.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: tylerlekang on July 17, 2014, 11:36:19 AM

Take 40k loan @ 7%, pay back in 5 years:
Earnings: $50k Roth @ 8% annual earnings for 5 years (no new contributions) = 50 * 1.08^5 = $73k

Total interest paid: I'll use a mortgage calculator, $40k loan, 7% interest rate. Total Interest paid is $7.5k

http://www.mortgagecalculator.org/

Net change = earnings - cost = 23k - 7.5k = 15.5k ish
Costs: $40k loan

Ending Net Worth = $73k

Remove 40k from ROTH IRA:
Let's assume your IRA manager has a stated rate of 4%. Your new IRA balance on 8/1/14 becomes $10,000

Earnings: 10k Roth @ 8% annual earnings for 5 years = 1.08^5 * 10k = $15k
Then, at the end of each year you pay back $10k, which then starts "earning" again. Here is the value of these payments at the end of the 5th year.
Y1 payment: 1.08^4 * 10k = $13.6k
Y2 payment: 1.08^3... = $12.6k
Y3 payment: 1.08^2... = $11.6k
Y4 payment: $10k (paid on last day)

Total interest paid for IRA loan: $4.1k, $40k loan @ 4%
http://www.mortgagecalculator.org/

Ending value: 15 + 13.6 + 12.6 + 11.6 + 10 - 4.1 = $58.7k

Some of these are going to be off, as they aren't exactly precise... but you get the idea.

AWESOME POST!! This is exactly what I was hoping to see when I first posted here. Thank you, sir! I owe you lunch, a beer, whatever you want.


Although, I wasn't planning on taking a loan from my IRA. I was going to withdraw the 40k and that was that. Then the 10k every year would simply be extra contributions of my own money, to put the money back in.

But now Angie55 claims you can't contribute more than 5.5k a year to a Roth IRA - which then prompts me to ask, why the heck do I have a Roth IRA?? It was all my own money from the start. Why didn't I just use that to purchase those index funds directly? Then I wouldn't be worried about penalties in the first place.

So perhaps instead of replacing the 40k in the Roth, what I do is take my 10k each year and buy the same funds directly. They'll grow at exactly the same rate as they would if they were in the Roth.

Right? What am I missing?



Anyway, thank you very much for the analysis!


I think the only way I can make it though is if I can somehow get all the money I need for living expenses from the Direct Grad PLUS loans.

The offer they made me in the notice I got this morning won't cut it. Especially if I can't get the money until later in August.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: tylerlekang on July 17, 2014, 11:44:47 AM
Cpa Cat, two very helpful posts as well! I owe you lunch and a beer too! :)

- I looked at last semester costs (tuition is frozen for us this coming year) and it should be about 18.7k for the two semesters. So from the 20.28k they give me, I'll have more than enough to pay the interest up front (should only be a few hundred) rather than letting that capitalize in the loan. It costs you more in the end when it capitalizes. That's what they say in the loan training, anyway.

- I know I have a bit of excessive costs. But I still think I'll need between 20k - 25k of living expenses for Aug 14 through May 15 (that includes living expenses from June - bill due Aug 2 - and whatever I pile up this month)

I think my only viable option is to see if I can convince them to give me that as the Direct Grad PLUS loan. It's 7.21% rate with a 4.something % origination fee. So if I took 25k they'd give me 24k at a 4% fee. That should be more than enough.

But .... will they give it to me. They're only offering 11k now.


- Thank you, I get it now on the Roth IRA. Basically, it's a tax shelter from capital gains as long as you're willing to sit on your investment for 30-40 years. It makes sense now. Thank you for explaining it to me!
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: Cpa Cat on July 17, 2014, 11:51:09 AM
Re: Paying off student loan interest.

1st loan: Student loan to cover costs of education. Tax deductible interest. Interest accrues and compounds.

2nd loan: Living expense loan. Not tax deductible. Interest accrues and compounds on every additional dollar borrowed.

Why take money from the non-tax deductible loan (raising your non-tax deductible interest) in order to lower your tax deductible interest?

All you're doing is giving up a tax deduction in favor of accruing more non-tax deductible interest. Mathematically, it doesn't make sense.

In your situation, you want to maximize money that counts as a "student loan," because it's tax-favored and minimize the money that isn't a student loan and therefore not deductible. Unless you're planning on going bankrupt. Then the opposite is true.

It makes sense to stop the interest from compounding if you have money to spare for it. But you don't. You are borrowing 100% of your costs. So, in your shoes, you want to keep the favorable interest and lower the disfavorable interest.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: rmendpara on July 17, 2014, 12:04:23 PM

Take 40k loan @ 7%, pay back in 5 years:
Earnings: $50k Roth @ 8% annual earnings for 5 years (no new contributions) = 50 * 1.08^5 = $73k

Total interest paid: I'll use a mortgage calculator, $40k loan, 7% interest rate. Total Interest paid is $7.5k

http://www.mortgagecalculator.org/

Net change = earnings - cost = 23k - 7.5k = 15.5k ish
Costs: $40k loan

Ending Net Worth = $73k

Remove 40k from ROTH IRA:
Let's assume your IRA manager has a stated rate of 4%. Your new IRA balance on 8/1/14 becomes $10,000

Earnings: 10k Roth @ 8% annual earnings for 5 years = 1.08^5 * 10k = $15k
Then, at the end of each year you pay back $10k, which then starts "earning" again. Here is the value of these payments at the end of the 5th year.
Y1 payment: 1.08^4 * 10k = $13.6k
Y2 payment: 1.08^3... = $12.6k
Y3 payment: 1.08^2... = $11.6k
Y4 payment: $10k (paid on last day)

Total interest paid for IRA loan: $4.1k, $40k loan @ 4%
http://www.mortgagecalculator.org/

Ending value: 15 + 13.6 + 12.6 + 11.6 + 10 - 4.1 = $58.7k

Some of these are going to be off, as they aren't exactly precise... but you get the idea.

AWESOME POST!! This is exactly what I was hoping to see when I first posted here. Thank you, sir! I owe you lunch, a beer, whatever you want.


Although, I wasn't planning on taking a loan from my IRA. I was going to withdraw the 40k and that was that. Then the 10k every year would simply be extra contributions of my own money, to put the money back in.

But now Angie55 claims you can't contribute more than 5.5k a year to a Roth IRA - which then prompts me to ask, why the heck do I have a Roth IRA?? It was all my own money from the start. Why didn't I just use that to purchase those index funds directly? Then I wouldn't be worried about penalties in the first place.

So perhaps instead of replacing the 40k in the Roth, what I do is take my 10k each year and buy the same funds directly. They'll grow at exactly the same rate as they would if they were in the Roth.

Right? What am I missing?



Anyway, thank you very much for the analysis!


I think the only way I can make it though is if I can somehow get all the money I need for living expenses from the Direct Grad PLUS loans.

The offer they made me in the notice I got this morning won't cut it. Especially if I can't get the money until later in August.

Sorry, missed the Roth part.

You can withdraw the contributions (gross value) without penalty any time (so look back at your statement, and find out what your total contributions were over the past however many years) and that's the total you can withdraw for free** (meaning no direct interest charge).

The point of the Roth is so that once you turn 60, you can withdraw any money and earnings without incurring any tax. No taxes ever again after you contribute.

A 401k is also a good vehicle. If you aren't clear on the differences between 401k & Roth, check out the forums as there have likely been a lot of discussions on that already.

Since you're not an expert investor, I suggest you do the following:

- No 401k/IRA/Roth loans or withdrawals... just take out a student loan (if your degree won't earn it's keep in your future salary/career, financing it a different way won't make a difference)
- Stay frugal and pay back your loans within 2-3 years (very doable on an engineer's salary
- Max out your Roth as well as your 401k (tax deferral during working years is a beautiful thing). People will argue until their tongues fall out over which is better. IMO, do both! Paying taxes now vs later is sort of a wash, and ppl will argue forever about it, but the real advantage is tax deferral between today and when you withdraw (no taxes on earnings on earnings on earnings for 25+ years)

Keep it simple. 90% of your fortune will come from mastering the basics (saving, investing, etc), the last bit can be squeezed out by being an expert investor, but not everyone is, so focus on the 90% and be happy.

Good luck!
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: tylerlekang on July 17, 2014, 12:09:18 PM
I wanted to do my own "more conservative" analysis based on what rmendpara posted.

I'm basing this instead on getting the two federal loans I think I'd need and then using only a 5% return on my index funds. I don't know why I'm stuck on this 5% number, perhaps because I've always heard that's what endowments usually return. But anyway...

Take 20.5k Direct Unsubsidized loan @ 6.21%,
take 25k Direct Grad PLUS loan @ 7.21%,
Plan to pay back in 5 years from graduating (6 years real time):


Earnings: $50k Roth @ 5% annual earnings for 6 years (no new contributions, though I might still try once employed) = 50 * 1.05^6 = $67k, thus total earnings are 17k

Loans costs: (I used a loan calculator http://www.bankrate.com/calculators/mortgages/loan-calculator.aspx  set it to five years with the principle and rate, then multiplied the calculated monthly payment by 60 to get the total cost)

20.5k @ 6.21  -- 23.9k
25k    @ 7.21  -- 29.85k

Total cost: 53.75, total interest paid: 8.25k

Grand total difference = 17k - 8.25k = $8.75k

Remove 40k from ROTH IRA:

Earnings: 10k Roth @ 5% annual earnings for 6 years = 1.05^6 * 10k = $13.4k
Then, at the end of each year employed you pay back $10k, which then starts "earning" again. Here is the value of these payments at the end of the 6th year.
Y1 - in school
Y2 payment: 1.05^4 * 10k = $12.2k
Y3 payment: 1.05^3... = $11.6k
Y4 payment: 1.05^2... = $11k
Y5 payment: $10k (paid on last day)


Grand total difference = 13.4 + 12.2 + 11.6 + 11 + 10 - 50 (original starting point) = $8.2k


Not quite as stark of a difference!

But perhaps 5% is way too conservative? Why 8%?
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: tylerlekang on July 17, 2014, 12:18:21 PM
Sorry, missed the Roth part.

You can withdraw the contributions (gross value) without penalty any time (so look back at your statement, and find out what your total contributions were over the past however many years) and that's the total you can withdraw for free** (meaning no direct interest charge).

The point of the Roth is so that once you turn 60, you can withdraw any money and earnings without incurring any tax. No taxes ever again after you contribute.

A 401k is also a good vehicle. If you aren't clear on the differences between 401k & Roth, check out the forums as there have likely been a lot of discussions on that already.

Since you're not an expert investor, I suggest you do the following:

- No 401k/IRA/Roth loans or withdrawals... just take out a student loan (if your degree won't earn it's keep in your future salary/career, financing it a different way won't make a difference)
- Stay frugal and pay back your loans within 2-3 years (very doable on an engineer's salary
- Max out your Roth as well as your 401k (tax deferral during working years is a beautiful thing). People will argue until their tongues fall out over which is better. IMO, do both! Paying taxes now vs later is sort of a wash, and ppl will argue forever about it, but the real advantage is tax deferral between today and when you withdraw (no taxes on earnings on earnings on earnings for 25+ years)

Keep it simple. 90% of your fortune will come from mastering the basics (saving, investing, etc), the last bit can be squeezed out by being an expert investor, but not everyone is, so focus on the 90% and be happy.

Good luck!

Thanks for everything you've said! I really appreciate it!

And I agree with your advice and will try to follow it.


If I can do the student loans for everything, I may try to do that. My intuition is that they won't let me borrow more than what was offered, meaning I'll have to take some of my Roth money out to live on.

In my conservative analysis, the difference wasn't as much. But any mixture of the two scenarios at least pushes it closer to the middle.


Thanks again!
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: rmendpara on July 17, 2014, 12:20:17 PM
You can look up long term S&P index performance and use that. Regardless, the main point is that borrowing (or withdrawing from Roth) is equivalent to taking out a floating rate loan. Even if the "planned" loss is only 5% (if you use that for your projection), it could be anywhere from -20% to +20%. If the market goes down, you could actually "make" money by borrowing now and repaying over time, however, if the market goes up (which over 5 year periods, it typically does) then you will lose potential investment returns.

It's anyone's guess exactly how much it will be, but changes are it will be 7%+.

http://www.moneychimp.com/features/market_cagr.htm (play with it and find whatever you like)

Again, you're speculating on the market.

Fixed rate 6-7% (student loan) vs floating rate withdrawal from Roth (+20% to -20%)... your choice.

Ideally, you can pay most through student loans, and have minimal Roth withdrawal, if any.

Good luck!
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: tylerlekang on July 17, 2014, 12:53:49 PM
So much great info, thank you rmendpara!
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: Gin1984 on July 17, 2014, 04:32:09 PM
Have you even looked into student loans? At my master's program, the financial aid office set an "estimated cost of attendance" that includes tuition, fees & a budget for living expenses. You are allowed to borrow up to the amount of this estimated cost of attendance in federal loans.

If your prior year tax return shows that you haven't been working at all, you may qualify for a Perkins loan (interest does not capitalize while you are still in school, lower interest rate).
Those, similarly to ANY subsidized loan, are not available to graduate students.  We also pay a higher interest rate for our loans than undergrads.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: marblejane on July 17, 2014, 05:17:42 PM
Have you even looked into student loans? At my master's program, the financial aid office set an "estimated cost of attendance" that includes tuition, fees & a budget for living expenses. You are allowed to borrow up to the amount of this estimated cost of attendance in federal loans.

If your prior year tax return shows that you haven't been working at all, you may qualify for a Perkins loan (interest does not capitalize while you are still in school, lower interest rate).
Those, similarly to ANY subsidized loan, are not available to graduate students.  We also pay a higher interest rate for our loans than undergrads.

I received a Perkins loan while in graduate school last year. They are available if you meet the income requirements.

EDIT: Here is the link to the federal website on Perkins loans: https://studentaid.ed.gov/types/loans/perkins
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: tylerlekang on July 18, 2014, 04:07:28 PM
Cpa Cat (or anyone interested...), would you mind checking me belong RE: loan interest capitalization discussion and your preference for full deferment rather than making interest only payments during the deferment period?

Found a great resource here: http://www.hesc.ny.gov/content.nsf/SFC/HESC_Interest_Capitalization_Estimator

So using the example of the Federal Direct Unsubsidized student loan that I plan to take to pay for my school costs this coming fall and spring semesters. (the tool assumes a standard 10 year repayment term and 6mo grace period)

Full Deferment

Total Fees:   $219.97
Loan Funds Disbursed:   $20,280.04
Amount Financed:   $20,500.00
Grace Period:   6 months
Full Deferment (including grace) Period:   16 months
Total Capitalized Interest:   $1,697.40
Total Repayment Amount:   $22,197.40
Monthly Payment:   $248.78
Total Interest Cost (after repayment begins):   $7,656.68
Total Cost of Loan:   $29,854.08


Making interest-only payments during the deferment period

Total Fees:   $219.97
Loan Funds Disbursed:   $20,280.04
Amount Financed:   $20,500.00
Grace Period:   6 months
Full Deferment (including grace) Period:   16 months
Total Interest Paid During Deferment:   $1,697.40
Total Repayment Amount:   $20,500.00
Monthly Payment:   $229.76
Total Interest Cost (after repayment begins):   $7,071.19
Total Cost of Loan:   $29,268.59


I guess I'm still not quite understanding how full deferment is a better option. Something to do with tax deductions for the interest ... but I thought you were allowed to deduct the interest you paid, not simply interest that has accrued (and will be capitalized).

Thanks for your patience and I look forward to understanding better!
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: seattlecyclone on July 18, 2014, 06:17:42 PM
In your second example, you paid $1,697.40 in interest during school. That means if you were deferring interest payments, you could have gotten by with a smaller initial loan. I ran the "full deferment calculation" again with a principal that's $1,697.40 lower, and got a monthly payment of $230 and a total cost of about $27,650.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: Cpa Cat on July 19, 2014, 08:48:34 AM
Yes, it's true that the interest will capitalize.

But so will the interest on your non-deductible "living" loan.

Paying interest on your student loan makes sense if you had $20,000 in student loans and $20,000 cash for your living expense.

But you have no cash for your living expenses. You have only more debt. That living expense debt will likely be at a higher interest rate and will not be deductible.

What you are not factoring into your calculations is: How much extra interest will you pay on your living expense loan if you take money and pay it toward your student loan.

If you have an extra $70 in your hand - What makes more sense? Paying down the student loan or paying down the living expense loan?

The truth is that every $1 you use to pay down the student loan interest isn't extra money - it's a $1 you borrowed elsewhere and will pay interest on.

I'm saying that in all likelihood, it will be to your benefit to lower the non-deductible living expense loan first. Now, we don't currently know the exact terms of that living expense loan, because it doesn't exist yet. BUT we so know that the student loans will have a fixed interest rate, the interest will be deductible, and you will have a lot of flexibility regarding your payment terms.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: tylerlekang on July 19, 2014, 12:42:41 PM
Yes, it's true that the interest will capitalize.

But so will the interest on your non-deductible "living" loan.

Paying interest on your student loan makes sense if you had $20,000 in student loans and $20,000 cash for your living expense.

But you have no cash for your living expenses. You have only more debt. That living expense debt will likely be at a higher interest rate and will not be deductible.

What you are not factoring into your calculations is: How much extra interest will you pay on your living expense loan if you take money and pay it toward your student loan.

If you have an extra $70 in your hand - What makes more sense? Paying down the student loan or paying down the living expense loan?

The truth is that every $1 you use to pay down the student loan interest isn't extra money - it's a $1 you borrowed elsewhere and will pay interest on.

I'm saying that in all likelihood, it will be to your benefit to lower the non-deductible living expense loan first. Now, we don't currently know the exact terms of that living expense loan, because it doesn't exist yet. BUT we so know that the student loans will have a fixed interest rate, the interest will be deductible, and you will have a lot of flexibility regarding your payment terms.

Thank you. Everything you say makes perfect sense.

Though here is one thing for you to consider: I am not going to take a person loan (in the regular sense). I am going to take a second Federal (fixed) loan that they offered me to use for my living expenses (though it won't be enough to cover what I think I'll need).

Principle: $11,414
Fee: 4.29%
Total amount dispersed: $10,924.34
Rate: 7.21% (fixed)


So let's pretend that I can get by on living expenses through May '15 using just the excess from the school costs loans (<$2k) and this other federal student loan of almost $11k. So I don't have to take any other loans (which I most likely won't anyway) or touch my Roth IRA (that would be great, but I'm not getting my hopes up).


Now, both my loans are Federal student loans so they're both "deductable" - as you say. I don't know what that means or what you're meaning is by that. But anyway, if I used $1700 from the other loan to pay the interest on the school costs loans then when I do my taxes next spring I can claim a deduction of $1700, right?

And since I won't have made very much money in 2014 (only a little bit from work in Jan, <10K and they already withheld some of that for taxes) then the government should be cutting me a check for $1700, right?

Or if I'm missing something or just don't understand, could you point me in the right direction so I learn?

Thank you very much for your help! :)
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: samburger on July 19, 2014, 12:50:15 PM
Why do you need $25k to make it to May?

I live in Minneapolis and $25k/year supports two adults with two cars, pets, and an apartment in an unnecessarily swanky neighborhood.

If you're not supporting a family on that, your living expenses are way high. Can you cut back, at least while you finish school?
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: Malaysia41 on July 19, 2014, 12:53:46 PM
Why do you need $25k to make it to May?

I live in Minneapolis and $25k/year supports two adults with two cars, pets, and an apartment in an unnecessarily swanky neighborhood.

If you're not supporting a family on that, your living expenses are way high. Can you cut back, at least while you finish school?

Exactly what I've been thinking.  Could you post your user case study #s with your expected expenses and maybe we can help you dial the living-expense side of the equation down.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: Cpa Cat on July 19, 2014, 01:50:21 PM
Though here is one thing for you to consider: I am not going to take a person loan (in the regular sense). I am going to take a second Federal (fixed) loan that they offered me to use for my living expenses (though it won't be enough to cover what I think I'll need).

Principle: $11,414
Fee: 4.29%
Total amount dispersed: $10,924.34
Rate: 7.21% (fixed)

So now you're paying 7.21% in order to pay off 6.8%. It just doesn't make mathematical sense. I get that you're trying to stop your loan interest from ballooning and compounding, but when you're borrowing 100% of the money that you'll be spending, there's no sense to paying debt off with higher interest debt.

Quote
Now, both my loans are Federal student loans so they're both "deductable" - as you say. I don't know what that means or what you're meaning is by that. But anyway, if I used $1700 from the other loan to pay the interest on the school costs loans then when I do my taxes next spring I can claim a deduction of $1700, right?

Yes. If you look at form 1040, line 33, that's where you deduct your interest paid.

Quote
And since I won't have made very much money in 2014 (only a little bit from work in Jan, <10K and they already withheld some of that for taxes) then the government should be cutting me a check for $1700, right?

Not quite. With your income so low, you'll get your withholding back regardless. But you won't get the $1700. A deduction isn't refundable. Only credits are refundable. In fact, your deduction will essentially be wasted unless you had enough income to owe taxes.

When you consider your debt, think about it in regular terms. Which debt would you choose to pay off first if you had the luxury of spare money? The one with the highest interest rate. As such, whatever loan has the highest interest rate is the one you keep as low as possible.

For you, your interest rates from highest to lowest:

Roth IRA loan (interest rate = forgone gains; may be as much as 20%, unlikely to be lower than 8%).
Living expense loan (interest rate 7.21, tax deductible when you have income)
Student loan (6.21%, tax deductible when you have income)
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: Gin1984 on July 19, 2014, 07:24:05 PM
Though here is one thing for you to consider: I am not going to take a person loan (in the regular sense). I am going to take a second Federal (fixed) loan that they offered me to use for my living expenses (though it won't be enough to cover what I think I'll need).

Principle: $11,414
Fee: 4.29%
Total amount dispersed: $10,924.34
Rate: 7.21% (fixed)

So now you're paying 7.21% in order to pay off 6.8%. It just doesn't make mathematical sense. I get that you're trying to stop your loan interest from ballooning and compounding, but when you're borrowing 100% of the money that you'll be spending, there's no sense to paying debt off with higher interest debt.

Quote
Now, both my loans are Federal student loans so they're both "deductable" - as you say. I don't know what that means or what you're meaning is by that. But anyway, if I used $1700 from the other loan to pay the interest on the school costs loans then when I do my taxes next spring I can claim a deduction of $1700, right?

Yes. If you look at form 1040, line 33, that's where you deduct your interest paid.

Quote
And since I won't have made very much money in 2014 (only a little bit from work in Jan, <10K and they already withheld some of that for taxes) then the government should be cutting me a check for $1700, right?

Not quite. With your income so low, you'll get your withholding back regardless. But you won't get the $1700. A deduction isn't refundable. Only credits are refundable. In fact, your deduction will essentially be wasted unless you had enough income to owe taxes.

When you consider your debt, think about it in regular terms. Which debt would you choose to pay off first if you had the luxury of spare money? The one with the highest interest rate. As such, whatever loan has the highest interest rate is the one you keep as low as possible.

For you, your interest rates from highest to lowest:

Roth IRA loan (interest rate = forgone gains; may be as much as 20%, unlikely to be lower than 8%).
Living expense loan (interest rate 7.21, tax deductible when you have income)
Student loan (6.21%, tax deductible when you have income)
Which may be a reason to pull some from a traditional IRA.  At least enough to cap out the standard deduction, personal exemption, and federal tax credit for tuition.  All of those are non-refundable.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: tylerlekang on July 19, 2014, 09:03:41 PM

So now you're paying 7.21% in order to pay off 6.8%. It just doesn't make mathematical sense. I get that you're trying to stop your loan interest from ballooning and compounding, but when you're borrowing 100% of the money that you'll be spending, there's no sense to paying debt off with higher interest debt.

Yes. If you look at form 1040, line 33, that's where you deduct your interest paid.

Not quite. With your income so low, you'll get your withholding back regardless. But you won't get the $1700. A deduction isn't refundable. Only credits are refundable. In fact, your deduction will essentially be wasted unless you had enough income to owe taxes.

When you consider your debt, think about it in regular terms. Which debt would you choose to pay off first if you had the luxury of spare money? The one with the highest interest rate. As such, whatever loan has the highest interest rate is the one you keep as low as possible.

For you, your interest rates from highest to lowest:

Roth IRA loan (interest rate = forgone gains; may be as much as 20%, unlikely to be lower than 8%).
Living expense loan (interest rate 7.21, tax deductible when you have income)
Student loan (6.21%, tax deductible when you have income)

Well the fact that I won't even be able to use the tax deduction takes the cake. I won't be making interest only payments during the deferment period on either loan.

It was a bit of a moot point, because I didn't realize the interest that would accrue during the deferment period was so high! Can't really afford to throw $1700 at it when I need that money to stretch living expenses out as long as possible on that loan before having to find other money.

Thanks again!
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: tylerlekang on July 19, 2014, 09:06:39 PM

Which may be a reason to pull some from a traditional IRA.  At least enough to cap out the standard deduction, personal exemption, and federal tax credit for tuition.  All of those are non-refundable.

Wouldn't I take an additional 10% penalty though, if I did that?
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: tylerlekang on July 19, 2014, 09:12:39 PM
Why do you need $25k to make it to May?

I live in Minneapolis and $25k/year supports two adults with two cars, pets, and an apartment in an unnecessarily swanky neighborhood.

If you're not supporting a family on that, your living expenses are way high. Can you cut back, at least while you finish school?

Ideally yes, and I will try. I track all my spending and it hasn't been pretty since May. Hopefully once school starts up again in Sept I can get it back under control somewhat.

But I still have to pay an expensive CC bill for June (due at the start of Aug) and will have to pay another expensive CC bill for July (due at the start of Sept). Hopefully Aug won't be quite as bad.

I decided to get a new CC that has 0% interest for the first 15 months on purchases and balance transfers AND no fee on balance transfers for the first 60 days. So I'll throw my current CC balance on that thing and make minimum payments until my loan money comes in at the end of Aug.

I decided I could part with a couple things that will get me enough cash to make it on rent/utilities until then.



Thanks again all for the great input! Perhaps with some luck and sacrifice, I'll be able to leave the IRA's unscathed.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: Gin1984 on July 20, 2014, 10:09:49 AM

Which may be a reason to pull some from a traditional IRA.  At least enough to cap out the standard deduction, personal exemption, and federal tax credit for tuition.  All of those are non-refundable.

Wouldn't I take an additional 10% penalty though, if I did that?
No, because it would count against your tuition/fees that the IRS allows you take money out of the traditional IRA for.  Just keep proof of your tuition/fees for that year.
Title: Re: Take (personal) loan(s) or withdraw from Roth IRA?
Post by: Emg03063 on July 20, 2014, 11:14:24 AM
The point of the Roth IRA is to save for retirement, not for school expenses.  It is also extremely valuable if you use it long term.  Over the short term it would be much easier for you to liquidate your retirement savings to pay for school, but over the long term you would be much better off taking a higher rate loan for school, paying that back quickly to minimize the interest cost, letting the ROTH money grow and continue funding that account.

No that's not what I was asking.

What I mean is to consider the two scenarios below:

a) Take 50k in contributions over to Vanguard and put it into their low cost index fund shares. You can take your 50k in and out at any time with no penalty or taxes. But if you try to take out the earnings before 59.5, you're penalized.

b) Purchase 50k of those same low cost index fund shares directly (via some means, I don't know exactly how). Then you can take the 50k and the earnings out at any time you want with no penalty (other than buy/sell commissions, I suppose).


How is there any advantage in a over b? That's what I was asking. Sorry - it's a bit of a tangent to the discussion.

The advantage of A is that you don't have to pay taxes on dividend and capital gain distributions on money in the tax sheltered account every year, and you don't pay tax on the appreciation of the shares when you sell.  In B you do.  The calculation you're looking for is basically as follows:

1.  Determine your expectation of the long term performance of your retirement funds (most planners are using ~8% these days AFAIK, but obviously nobody has a crystal ball).

2.  Determine what you expect your marginal tax rate to be over the repayment period under consideration.

Assuming your student loan interest is tax deductible, the opportunity cost of pulling your money out of the retirement accounts is the rate in A minus (your student loan interest rate)/(1-your marginal tax rate).  Unless your expectations for the stock market going forward are really low,  I'd go with the loan package.  You can always pull money out of retirement accounts later if you can't get a job and are in a cash crunch with paying the loan off, but if you pull it out now, you can't put it back.