Author Topic: Take (personal) loan(s) or withdraw from Roth IRA?  (Read 20991 times)

tylerlekang

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Take (personal) loan(s) or withdraw from Roth IRA?
« 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.

tylerlekang

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #1 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!

Angie55

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #2 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.

seattlecyclone

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #3 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.

shotgunwilly

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #4 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.

welliamwallace

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #5 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.

Eric

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #6 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?

boarder42

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #7 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.

okashira

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #8 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...

FastStache

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #9 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.

tylerlekang

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #10 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.

tylerlekang

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #11 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.).

tylerlekang

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #12 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.

tylerlekang

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #13 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!

tylerlekang

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #14 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.
« Last Edit: July 15, 2014, 07:26:28 PM by tylerlekang »

tylerlekang

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #15 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!

boarder42

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #16 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. 

tylerlekang

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #17 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.

seattlecyclone

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #18 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!

tylerlekang

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #19 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.

Gin1984

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #20 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.

tylerlekang

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #21 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.)

tylerlekang

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #22 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%.

4alpacas

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #23 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. 

Gin1984

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #24 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?

lhamo

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #25 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. 

marblejane

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #26 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).

snuggler

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #27 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.

Frugal Father

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #28 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.

tylerlekang

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #29 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.

tylerlekang

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #30 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...

tylerlekang

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #31 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!

tylerlekang

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #32 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!

lhamo

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #33 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.


frugaliknowit

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #34 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....

tylerlekang

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #35 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!
« Last Edit: July 17, 2014, 10:32:32 AM by tylerlekang »

rmendpara

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #36 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?

Angie55

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #37 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
« Last Edit: July 17, 2014, 10:36:22 AM by Angie55 »

tylerlekang

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #38 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

tylerlekang

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #39 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!"

Angie55

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #40 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.

tylerlekang

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #41 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).

Angie55

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #42 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.

Cpa Cat

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #43 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.
« Last Edit: July 17, 2014, 11:18:40 AM by Cpa Cat »

rmendpara

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #44 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.
« Last Edit: July 17, 2014, 11:53:05 AM by rmendpara »

tylerlekang

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #45 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!

FrugalSpendthrift

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #46 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.

tylerlekang

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #47 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.

Cpa Cat

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #48 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.

Cpa Cat

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Re: Take (personal) loan(s) or withdraw from Roth IRA?
« Reply #49 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.