Borrow from CC to Invest

[Guizmo]

Hello fellow mustachians,

I have a very specific question regarding a situation I am in.

I'm currently saving to buy another investment home. Thus I am not currently contributing to my Roth IRA. I don't expect to be able to have enough for the down payment until next year after the deadline (tax day, right?) to contribute to this year's RIRA. Although I will have money afterwards.

Since currently I will likely not contribute to my RIRA for this year, I am intrigued by the fact that my credit card mailed me checks to use for 12 months interest fee with a 2% transaction fee. I was thinking of writing a check to myself to be able to deposit it in my RIRA account. I will pay it off before I pay interest and this will allow me to max out the RIRA this year.

What do you all think? Is paying a 2% transaction fee ($100) worth being able to max out this years' RIRA and thus have decades of compounding in a tax advantaged account?

[Beric01]

This guy over at the Bogleheads forums used 0% interest credit cards among other things to invest in the market with leverage, just before the 2008 crash. Guess what happened.

If you lose everything can you still make the payment on the sum invested? What if you lose your job in the meantime? If not I would not be considering this.

[Dodge]

At first I thought it was a great idea, since you'd be paying it off with your paychecks.  But if you lose your job, as Beric01 mentioned, and can't pay it back, now you have thousands of dollars in credit card debt, and no ability to repay it.

I would only do this if your emergency money could pay off the credit card if you lost your job.  But wait, now you have no emergency money, at the exact time you needed the emergency money!

I wouldn't do it.

[Guizmo]

Thanks for the replies. I have a pretty secure job at the moment and currently no debt. If I were to lose my job between now and the purchase of my next rental property, I would not be able to purchase that said property and I would be free to use the nearly $20k I have already saved up to pay off that CC debt.

If I were to lose my job, after I purchased the rental property, thus when I will have maybe a thousand dollars in my bank account (although likely more), I should still be able to service at least the minimum payment because of my low expenses and the fact that I receive $500 after expenses from my already paid off rental condo and an additional $400 from side gigs.

The only time I would be really screwed is if I lost my job, my tenant left my current rental condo and I was not able to rent out my new rental property and could no longer do my side gigs all while having to pay off $5000 in CC debt. In that case, I would have to withdraw from my current RIRA account. Just writing about it, I don't think I should have a problem. Although I might see if I can open up a HELOC on my current rental property as added security.

[Rob]

I think it's a good strategy. Absolute worst case you could probably find someone to (parents? peer lending? me?) to loan you the (at most) 5.5k at a reasonable interest rate. It's not like you are leveraging 210k like that post above. I would not do the 2% checks though. I would open a new card at 0% intro APR and you can probably get around ~$500 as a sign up bonus. That would cover a year of interest on that 5.5k if it came to that.

[Zoot Allures]

Sounds like you're in a decent position to do this with relatively low risk. I did the same thing last year. I was running out of time to contribute to my Roth IRA, so I used a 0% cash advance offer with a 2% transaction fee to write myself a check for 5 grand, and I dumped it into my Roth IRA. I have a stable job and wasn't worried about not being able to make the payments. The market did great and I'm on track to pay off the balance by the end of the year, so naturally I feel like a genius now. If the market had done poorly, it still would have been worth it over the long term to make that contribution, but it wouldn't have felt nearly as validating. Even with the good returns, the debt hanging over my head has been a bit stressful, even at 0% interest.

[trailrated]

This guy over at the Bogleheads forums used 0% interest credit cards among other things to invest in the market with leverage, just before the 2008 crash. Guess what happened.

If you lose everything can you still make the payment on the sum invested? What if you lose your job in the meantime? If not I would not be considering this.

Holy shit I read the entire thing last night, that is insane. Thanks for sharing!

[matchewed]

The difference between $5k @ 7% for 9 years and $4.9k @ 7% for 10 years is $440. Are all the risks that people have mentioned worth $440 in 9/10 years? or $300 in 4/5? I'm not saying it's a bad idea. You have to be comfortable with your risks. But don't waive them away. Really run some numbers here, what is the interest if you don't pay off the loan in time? Have you read all the fine print and understand every risk that is inherent in borrowing this money?

[richcatpoorcat]

Interesting thread. I have been thinking about this same idea the past few weeks. Especially with all of the 0% APR offers

[surfhb]

Borrowing to invest is just plain silly and risky.    I take it you weren't investing around 2001/02?

[Mazzinator]

Not sure why you can't put your down payment savings on hold while you max out the ira?

Or for peace of mind, you could pull money out of the cc and put it in savings and consider the down payment savings done. That way if SHTF, then you can just pull the cash right out. And then use your monthly savings to fund the ira??

Maybe if you told us more about your plan we could help optimize your strategy while minimizing your risk??? Or at least we can help brainstorm some ideas...

For what it's worth, i'm also working out a plan of investing while saving for a down payment on an income property....so maybe you'd just be helping me ;-)

[Zoot Allures]

Borrowing to invest is just plain silly and risky.    I take it you weren't investing around 2001/02?

In principle I totally agree, but the Roth IRA presents an interesting conundrum: borrow money at 0% interest to fund it for the year, or lose the opportunity forever. I wouldn't make a habit of this method, but I don't think it's a terrible thing to do if the investor has stable income and a solid plan for paying off the loan.

[Terrestrial]

While I wouldn't do it, what you're planning isn't a HORRIBLE idea, because of another handy Roth feature, pulling contributions.  I suppose worst case if you needed to pay back the money in event of a job loss or such before you get hit with the huge penalty rate that usually comes with not paying off 0% interest offers on time (they frequently result in back-charges for interest for the entire interest free period as well), you can always just pull the contribution back out and pay it off.  There are not tax or penalty implications to doing so. 

The only risk you would take is if you had it invested and the investment was substantially down.  Depending on how much is in there you may have problems pulling enough to pay off the note, or you may be forced to sell an investment when it's temporarily down, never a great situation.  If you have several years of contributions already in this Roth, you probably have more than enough to pull the 5k if you really needed it.

But again, I second the people who said, don't borrow money for a stock market investment, even if the terms appear to be favorable on the surface.

[surfhb]

Don't do it!    Just don't do it!   

These crazy bull markets does something to people and turns them into greedy idiots.  Lol

[Guizmo]

Spine:

That is exactly what I meant to say. I don't want to lose the opportunity to max out the ROTH IRA for the 2014 year, because I will never have the opportunity to do so again. I won't make a habit of doing so. I am only doing so because I want to get my rental property as soon as possible.

It's not that I think there is no chance to lose money doing so, I just happen to think that from an ER perspective I want to have a sizable amount of contributions in my Roth Account to be able to fund retirement before the ROTH Pipeline is mature. I think it is riskier than usual but because I have multiple income streams (side gigs, full time job, paid off rental property) and as someone else mentioned I am even able to withdraw contributions from the Roth if everything in my life turned sour. Now I probably wouldn't do it if I had a wife and kids or any other debt, but I'm still young and I don't mind taking extra risks now.

[GGNoob]

As long as you can pay it off no problem before it's due, I'd borrow the money to max out an IRA.