Author Topic: Would you take principal out of your Roth IRA to pay down student debt?  (Read 4154 times)

bokonon

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My wife and I are starting to attack our student debt after discovering MMM.

I have some cash in a Roth IRA, right around $25k in contributions I could pull out and put toward student loans (we have $135k, 75k at 6.8%, 60k 5.0%).

It's going to take us about 4-5 years to pay off depending on our lifestyles and incomes if all goes well... that $25k would be an amazing jumpstart, but that is money I will never be able to get back into a Roth IRA.  On the other hand I will get a guaranteed 6.8% on the money (lifetime returns on my Roth is like 1.3% annually, I started it back in 2007 or 8).

What would you do? 

Thanks!


gecko10x

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Re: Would you take principal out of your Roth IRA to pay down student debt?
« Reply #1 on: December 04, 2012, 06:35:30 PM »
In your shoes, I would (given your interest rates and historic return).

chucklesmcgee

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Re: Would you take principal out of your Roth IRA to pay down student debt?
« Reply #2 on: December 04, 2012, 07:31:12 PM »
In your shoes, I would (given your interest rates and historic return).

It's a tough call.  You are giving up all future tax savings on those earnings as well. If you're invested in some wussy bond fund or high expense-ratio managed fund, kill the debt. If you're in a total stock market index... Well it's a tough call.

If we were truly playing a market that was delivering returns that continue to average 8% in the long run and I assume you'd keep it in 30+ years, I' would keep it in. But there's no reason to know that returns like that this should or would continue. Plus there's the generally despicable feel of having debt, extra costs and the risks that you'd potentially be on the hook should your income change or something else happen. I'd kill the debt.

bokonon

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Re: Would you take principal out of your Roth IRA to pay down student debt?
« Reply #3 on: December 04, 2012, 07:49:57 PM »
Yeah I guess it's win win either way.  It's in Vanguard in target retirement 2045, so I think 0.19% expense ratio.  It has done better that I thought, I've actually had it since 2004 (can't believe how time flies!) and I've contributed $21k, current value is 25k.

I think I might use the principal to jump start the debt payoff.  It will be a psychological victory to see the loan (and interest payments) decrease.  After the student loans are gone and we are comfortable living a lifestyle of saving I believe we will be able to save aggressively for purchasing a home and then for retirement, so losing my current retirement savings doesn't hurt as much.

arebelspy

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Re: Would you take principal out of your Roth IRA to pay down student debt?
« Reply #4 on: December 05, 2012, 06:38:27 AM »
I wouldn't.  I'd be maxing the Roth each year, and then working on paying those down.

Also I'd be doing shenanigans like credit card balance transfer at 0% to pay down 10k or whatever the limit is of the student loan, then save up in interest earning account to pay off the CC all at once when the rate will jump (typically after a year), then repeat.  Would save about $700/year in interest for about 10 minutes of work.

Those sort of tricks and aggressive paydowns.  But I wouldn't touch the Roth, and I'd keep adding to it, in fact.

But YMMV.  Good luck with whatever you decide.
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jrhampt

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Re: Would you take principal out of your Roth IRA to pay down student debt?
« Reply #5 on: December 05, 2012, 07:26:14 AM »
I wouldn't.  I'd be maxing the Roth each year, and then working on paying those down.

Also I'd be doing shenanigans like credit card balance transfer at 0% to pay down 10k or whatever the limit is of the student loan, then save up in interest earning account to pay off the CC all at once when the rate will jump (typically after a year), then repeat.  Would save about $700/year in interest for about 10 minutes of work.

Those sort of tricks and aggressive paydowns.  But I wouldn't touch the Roth, and I'd keep adding to it, in fact.

But YMMV.  Good luck with whatever you decide.

Interesting tactics...I wonder if there would be any reason to do this with a mortgage.

bogart

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Re: Would you take principal out of your Roth IRA to pay down student debt?
« Reply #6 on: December 05, 2012, 08:10:32 AM »

Also I'd be doing shenanigans like credit card balance transfer at 0% to pay down 10k or whatever the limit is of the student loan, then save up in interest earning account to pay off the CC all at once when the rate will jump (typically after a year), then repeat. 


Interesting tactics...I wonder if there would be any reason to do this with a mortgage.

In theory, sure.  But in today's context, not tremendously likely to be useful:  most teaser rates come with about a 3% fee (tacked on up front), and fixed mortgages at historic lows (I'm seeing 3-4% for 30-year fixed).  All that said, if you're stuck with a higher interest rate because of being underwater on your mortgage or planning to move soon and it therefore doesn't make sense to refi, could be useful.


trammatic

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Re: Would you take principal out of your Roth IRA to pay down student debt?
« Reply #7 on: December 05, 2012, 08:37:07 AM »
I wouldn't.  I'd be maxing the Roth each year, and then working on paying those down.
+1

The huge limit with Roth's is the contribution limit.  It would take 5 years to contribute that much to an IRA again.  Find other ways to bust it, and get rid of the debt that way.  It would have only taken No More Harvard Debt another 2 or 3 months to pay off his loans if he hadn't dumped his retirement funds...

James

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Re: Would you take principal out of your Roth IRA to pay down student debt?
« Reply #8 on: December 05, 2012, 09:15:15 AM »
The pressure of debt is pretty powerful, keeping that out there could provide the incentive you need to save and pay it down faster.  On the other hand, a jump start can be a psychological kick-start and get you in gear to pay it off.  Only you can know the psychological advantages of each and what is best for you.

Having said that, I'd lean toward arebelspy's idea, I think you would be really glad when you finished paying off the debt to have that nice chunk still in your Roth.

twinge

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Re: Would you take principal out of your Roth IRA to pay down student debt?
« Reply #9 on: December 05, 2012, 10:25:21 AM »
+1 for not touching the Roth IRA
 
it's good to have that dimension of tax-free growth in your portfolio.  Also, you're forced to pay down that debt so it will be done.  No one is forcing you to fund a Roth IRA so it's harder to be disciplined about it.

secondcor521

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Re: Would you take principal out of your Roth IRA to pay down student debt?
« Reply #10 on: December 05, 2012, 12:55:35 PM »
I wouldn't touch the Roth.

The student loan debt is a boat anchor around your neck.  Paying it off with your earnings will help you viscerally understand the size of that debt and the consequence of having taken it on.  This visceral understanding will help you better evaluate future debt and hopefully not take on more debt than is prudent.

One potential example of this is when people go to buy a first home, they somehow figure out what they can afford, but then when they go and look at potential purchases, they stretch to get into a nicer home and add an extra, say, $50k to their mortgage.  ("Hey, that's only $21.58 more per month on the payment!")  It's easy to take on the extra amount; it's hard to actually pay off.

Using the Roth would short circuit the above process and I think you'd be farther behind eventually because of it.

2Cor521

mustache brony

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Re: Would you take principal out of your Roth IRA to pay down student debt?
« Reply #11 on: December 05, 2012, 01:02:46 PM »
I'd keep the money in the Roth. You can never make up the money you take out of it (if I understand correctly, it's a flat amount per year period), and it's a valuable fall-back resource (which grows tax free!).