Roth IRA vs. SL. HELP!

[NavyLifter]

I know this isn't "general credit" issue, but there really wasn't another forum to post this in besides the Student Loan forum.

I'm hoping some savvy financial wizards can give me a bit of advice.  Last year I contributed $5,000 towards a Roth IRA through E*Trade.  However, I've recently been thinking about using what I currently have in there to pay off a couple small student loans.

I have 8 SL total...5 are under $2,000.  I know I'll be subject to a 10% withdrawal penalty from the IRA, but I'd feel better financially if I cashed out what I have in there ($4,360) and paid off 2 more of those small loans. 

I'll restart an IRA or 401(k) when I get a full-time teaching job, but for now I'd feel more comfortable putting what's left in the IRA towards the SL.  Any ideas? 

I'd really appreciate the advice.

[Anonymous]

If you are looking at it as to which would be less costly to you.....figure what your penalty might be and what you would pay in interest by continuing to pay on those loans.

Also, if you are going to become a teacher, there are several "loan forgiveness" programs for teachers if you teach in certain areas. I am sure there are more requirements and requirements may vary, but something to think about.

Are the SL in repayment?

[NavyLifter]

Yes, they are in repayment.  It does say there isn't a withdrawal penalty if it is used for "qualified higher education" purposes.  This would qualify I'm assuming?

[Anonymous]

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NavyLifter wrote: 
  This would qualify I'm assuming?

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You would need to contact them and ask that question.

[NavyLifter]

Ok, thanks.  Just so I'm clear on this, other than paying any penalties, it's entirely doable to take an early distribution and cash out what little is in there, correct?

[sky_king03]

Are you struggling to pay your student loans? Do you have an emergency fund in place? If you don't I would withdraw from your Roth. You can use those funds as an back-up emergency fund in place of something more liquid like a money market. If you are not struggling to repay your loans I would take from your Roth. While a couple years may not seem like a big issue it could be a big difference when you retire. A $ 5000 deposit with no added deposit with an 8% return in  20 years would be $ 24,634. The same over 18 years is $21,002. That's a $3,600 difference.

If you absolutely feel like you need to take the money from your Roth. You could withdraw the full amount with no tax penalties. You can always withdraw your contributions tax free you can't withdraw any earnings tax free.

[Jazzzy]

I found this on the Fidelity site...but I'm not certain I totally understand it...

Withdrawal rules for Roth IRAs

A qualified distribution from a Roth IRA is tax-free and penalty-free, provided that the five-year aging requirement has been satisfied and one of the following conditions is met:

• Over age 59½
• Death or disability
• Qualified first-time home purchase

A non-qualified distribution is subject to taxation of earnings and a 10% additional tax unless an exception applies. For Roth IRAs, you can always remove post-tax penalty contributions (also known as “basis”) from your Roth IRA without penalty. Consult your tax advisor about your particular situation.

[compassion101]

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@Jazzzy wrote:

I found this on the Fidelity site...but I'm not certain I totally understand it...

Withdrawal rules for Roth IRAs

A qualified distribution from a Roth IRA is tax-free and penalty-free, provided that the five-year aging requirement has been satisfied and one of the following conditions is met:

• Over age 59½
• Death or disability
• Qualified first-time home purchase

A non-qualified distribution is subject to taxation of earnings and a 10% additional tax unless an exception applies. For Roth IRAs, you can always remove post-tax penalty contributions (also known as “basis”) from your Roth IRA without penalty. Consult your tax advisor about your particular situation.

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Basically it means that, as an example, if you contribute $10,000 to a Roth IRA and later it is worth $12,000, the $10,000 can be withdrawn early without paying any tax or penalty on it. The $2,000 of earnings, however, must either be a qualified distribution (likely not unless it's to buy a first home) or else it is subject to be taxed at your tax rate plus a 10% penalty.

[Luscher]

NEVER TOUCH YOUR RETIREMENT ACCOUNT! Compounding interest is the greatest thing in the world. Leave your money in there and keep adding to it!

[heyitsyeh]

A balanced approach (with the specifics to your own discretion) would be a far better choice. If you are making under 75k a year, you can write off up to $2500 in taxes for based on the amount of interest you paid on a student loan. Not saying to drag out your loan indefinitely (I myself am paying down a 45k loan aggressively in 2 1/2 years) but know that there is no point putting off investing in the greater returns and compounding of Roth IRAs for the sake of SLs.

Source:

http://www.irs.gov/publications/p970/ch04.html