The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: lemonlime on July 18, 2014, 09:46:00 AM
-
I've got a big chunk of debt spouse and I are working on. While we've made good progress (10K in 5 months), we still have a ways to go.
I have made enough contributions to my Roth IRA to be able to withdraw the amount I need to pay off my car without penalty. My understanding is that withdrawals of money you contributed are not penalized, but withdrawals of any growth is. The amount would be about $3400 to pay off the car. The car loan itself is only 1% interest, and the monthly payment is only $144 because I put more than half the value down when I bought the car.
My feeling is that psychologically, I need a "win" - to pay something off. I could then allocate the money previously going toward the car toward high interest debt. Sort of - I just did a balance transfer for 0% for 12 months, 3% transfer fee for the highest balance and interest rate debt (consumer credit card) that I'm trying to pay off. That's what I would apply the previous car payment money to, and given my budget the balance transfer should be paid off by January (or sooner if I get a promotion and spouse gets a better job, which he has a strong prospect of in the fall. I also took a part time hourly work opportunity in my field, on top of my full time salaried job, so that should help too).
My concern is the opportunity cost of taking the money out of the Roth when I won't be able to contribute much to it until this debt is gone (hopefully within the next 18 months everything will be paid off). I feel like there are other downsides I am not quantifying/assessing. I just really want to pay something off NOW, it's been a few months since the last item was paid off.
So any thoughts would be appreciated, things I'm not considering. Maybe I just need to be talked out of my psychological need for a win. I really want to get more things paid off NOW though.
-
You should check out the thread that I just finished up in this same forum. It was in regards to taking out personal loans vs. withdrawing from Roth IRA. It shouldn't be too far down.
At the end it shows how to calculate the difference. I suspect you'd end up losing more money by taking the money our of the Roth and then replacing it later vs. how much it would cost to finish out the loan. But the difference may not be as much as you think, depending on what variables/assumptions you use.
Good luck!
-
I would not withdraw from your IRA to pay off a loan at 1%. You should be concentrating on paying off the 0% interest loan and making sure your butt is covered. If you happen to miss paying it off due to some emergency there will be back interest charges for the entire amount.
-
You're driving yourself by a feeling of a need for a win. That is probably not a good way to make your financial decisions. Run the math and understand the impacts. The math would be the growth that you would sacrifice for 18 months. To be honest a 7% annual growth on $3400 wouldn't be much, but any debt payment is the equivalent return of its interest. You're sacrificing a potential 7% return to get a 1% return. Bad math in my mind. Have you considered selling the car and just getting a cheaper used car? Have you considered just paying it off normally and accepting the awesome fact that you've paid off 10k worth of debt in five months as your win? It is all how you view your events. Don't pre-load the event to establish your wins, celebrate your accomplishments to establish your wins.
-
If you want to feel better, tackle the smaller balance first, but do not touch the Roth. While in certain situations paying off debt with the roth is a better use of capital, once principal is taken out of a roth for a certain period of time (maybe 90 or 180 days...don't quote me; if you need to know look it up...) it cannot be replaced like other capital can be (such as a regular investment account outside of a retirement plan). Furthermore, in your case, your debt is all low interest (the fees are already gone, so they are irrelevant at this point...facepunch!!)
DON'T DO IT!!
-
DON'T DO IT!!
+1. You have 0% interest debt, and 1% interest debt, and you are considering pulling money from a permanently tax deferred vehicle for a psychological win.
Start tracking the assets within your Roth for the psychological win. Make sure the 0% interest debt doesn't turn into 15%, but other than that don't worry about this.
I've got a big chunk of debt spouse and I are working on. While we've made good progress (10K in 5 months), we still have a ways to go.
This is badass. Whatever you did over the last 5 months, keep doing it and this will be paid off in no time at all. Seriously, this is badass, and remembering that should provide your psychological win.
-
Absolutely keep doing what you're doing.
It's all a constant battle. Don't lose sight of the end by little obstacles you have to cross.
$10k in 5 months?
If you're at even half that pace, your car should be paid off within a year. Personally, I would pay off the credit card, as it has already cost you 3% and will cost you many MANY more dollars of interest if you go beyond the 0% rate period.
Simple math tells you that you shouldn't use something that is likely to earn 7%/yr to pay off something that costs you 1%. It's also only $3,400... that's maybe 1-2 months of saving anyway.
Slow, steady, and methodical wins the race (to financial freedom). There are no shortcuts.
Unless the small amount of debt makes you so stressed out that you can't eat or sleep... I'd suggest you pay it off as you can rather than withdrawing from Roth.
-
Yeah, leave the Roth alone. You can have that money grow tax-free in the Roth for decades if you leave it alone; losing that benefit is not remotely worth paying off a 1% debt a few months sooner.
Keep doing what you're doing and you'll have massive psychological wins in short order. Imagine having no debt and a nice Roth balance. Won't that be nice?
-
Don't withrawal from your ROTH - it is a very bad move.
I understand your need for a "win", but in my mind, paying down 10K in debt in 5 months is a HUGE win! Keep it going!
-
Thank you, everyone who replied!
I'm going to hold tight and leave my Roth alone. I will focus on killing the balance transfer. I will use this as an exercise in building my patience and diligence muscles.