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Thanks to a recent spate of unemployment, job changes, and moving (twice), I have found myself with a bit of debt. Coincidentally, the stock market has diminished my Roth IRA to the point where it is now equivalent to this bit of debt. It is now less than $10k and seems silly to keep watching it decline in value despite being in solid companies like MRK, WMT, ASEI, and BRK-B when I could theoretically use it to even out the balance sheet.

With that in mind and knowing that I would fund this year's Roth only if the CC debt is paid (can't afford both):

1) Would it be Foolish to sell the investments in my Roth and pay the debt?

2) Are there any hidden penalties for doing so?

3) Any other suggestions, tips, ideas?

TIA,

Minxie
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If you take money out of an IRA you will be taxed on that money and pay a penalty. Since you have a RothIRA which is funded with after tax dollars, i'm not sure if you will be taxed, but you will pay a penalty.
Michael
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Since you have a RothIRA which is funded with after tax dollars, i'm not sure if you will be taxed, but you will pay a penalty.

This is incorrect information. Contributions to a RothIRA can be withdrawn at any time without penalty. If OP's Roth is worth less than the money contributed to it (mine is, I know that) then there is no penalty for withdrawal. That being said, in OP's position, I would only withdraw and pay off the CC debt if I knew I would not be running up the CCs again, ever. Also, I would make sure I had the financial control over myself to contribute again to the Roth this year, and fund it as fully as possible.

Normally it's not recommended around these parts to raid one's retirement accounts to pay off CC debt. However, I can see how an amount under $10K, if it would erase interest-accruing debt, might be worth withdrawing for the purpose. It seems from OP's post that he/she is NOT beating average market returns. ;-) The $10K can be replenished within two years. In this particular instance, I don't see much harm in it (again, given the stipulations above).

Kasha
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Normally it's not recommended around these parts to raid one's retirement accounts to pay off CC debt. However, I can see how an amount under $10K, if it would erase interest-accruing debt, might be worth withdrawing for the purpose. It seems from OP's post that he/she is NOT beating average market returns. ;-) The $10K can be replenished within two years. In this particular instance, I don't see much harm in it (again, given the stipulations above).


Yes, Kasha, all of what you stated is correct. I have contributed $21k to my Roth and it is now worth about $10k. With the contribution level currently at $5k/year, I could very easily replace those funds and buy more shares than what I currently own over the next two years (or just keep my funds in cash for awhile...)

I do not expect to run up my credit card again but I am basically just rearranging my balance sheet. This CC is my UPromise card so they pay me 1% on everything and the interest rate is at 5.15% so carrying costs aren't that much. Buuuutttt....the stock market keeps dropping and dropping and dropping, and while I can look at my 401k and remind myself that I am in it for the long haul, I am still getting a bit antsy.

Thank you for your perspective.

Minxie
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There is absolutely no reason to raid a retirement account to squash a one-time expense.

1) It papers over the fact that you spent more than you earned. Adjusting this habit is critical. (And socking away money for retirement is "spending" in this sense. Mandatory spending, but spending nonetheless.)

2) Selling now just locks in the loss.

3) Who the heck cares if they're down today. They won't be down forty years from now when you actually retire. If looking at the numbers depresses you then there is a simple solution: don't look at the numbers.

I know how much I've invested for retirement because I'm capable of keeping a running total in my head, but I have absolutely no clue what the value of the account is today. I only see the number once every three to six months when I have to log in to raise my contribution. Ditto stock prices -- turns out BoA is like $4 now, first time I bought it was $55, wowza... and then I closed the browser and went on with my day.

4) The amount of Roth eligibility you have is sharply limited and if you take money out after putting it in you never get that eligibility back. (You mention you can easily replace the $10k. If that is true, you could easily replace the debt, while continuing to invest in your Roth because investing in your Roth is not an act it is a habit, right.)

Especially for young workers, the price of replacing Roth eligibility by paying extra for a non-tax-advantaged investment is staggering -- I worked the math for somebody recently and under one set of reasonable assumptions it costs $1.40 tomorrow to get a rough equivalent of $1 worth of Roth eligibility today.

*Rough* equivalent -- you have to pay taxes on your dividends and that causes a 1% drag on investment performance. If you know anything about compounding that sort of footnote should strike absolute terror into your heart. (If you invest $1 at 7% for 30 years, you end up with $7.60. If you invest $1 at 8% for 30 years, you end up with over ten bucks.)
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1) Would it be Foolish to sell the investments in my Roth and pay the debt?

No. IMO, it would be foolish, especially since you said in your other post that your rate is only 5.15%. If you are not happy with your investments, you can always change what your current Roth is invested in, rather than withdrawing from the Roth.

2) Are there any hidden penalties for doing so?

As long as your total current Roth balance is less than your contributions, there are no penalties or taxes. You do need to include all Roth accounts.

3) Any other suggestions, tips, ideas?

Since your credit card debt is only at 5.15%, I would suggest paying the debt off over time, rather than taking the easy way out.

AJ
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It papers over the fact that you spent more than you earned.

On rereading this sounds perhaps not obvious in the context of unemployment, a job loss, and two moves, so I want to expand on it a little bit.

Unemployment, job loss, and moving are not exceptional events. You do not live in 1950s America or 1970s Japan -- lifetime employment is a rarity, interruptions in employment are a reality, you must adjust to the reality or be crushed by it. For people my age (26), you should expect them to happen to you multiple times over the course of your career. You cannot use your retirement funds as an emergency fund for these occasions because if you do you will get to retirement and then find that you spend the equivalent of $10,000 a year of post-retirement income that time you lost a job at 27 and another $20,000 a year of post-retirement income when you got married at 30 and another $25,000 when you got your first house at 35 and...
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My personal rule for retirement savings (IRA, ROTH IRA, 401K) is once the contribution goes into retirement savings, it doesn't come out unless I need the money to prevent myself from becoming homeless.

If you cash out your ROTH now, you've essentially bought high and sold low, the exact oppose of how to build wealth/retirement savings. IMO you should consider that money untouchable (except for moving it among investments in a retirement account).

Pay off the cc through income and LBYM instead. Sell items you don't need and apply those to the debt. Take on p/t work if possible and put that towards the debt. You're not paying a punishing interest rate, so it isn't adding to the debt horribly and you can consider you're getting a 5% return on your money with each payment.
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Unemployment, job loss, and moving are not exceptional events. You do not live in 1950s America or 1970s Japan -- lifetime employment is a rarity, interruptions in employment are a reality, you must adjust to the reality or be crushed by it. For people my age (26), you should expect them to happen to you multiple times over the course of your career. You cannot use your retirement funds as an emergency fund for these occasions because if you do you will get to retirement and then find that you spend the equivalent of $10,000 a year of post-retirement income that time you lost a job at 27 and another $20,000 a year of post-retirement income when you got married at 30 and another $25,000 when you got your first house at 35 and...

This was very nicely said, bingocards -- I like how you articulate that we should expect these things during our lives -- that is very true and most of us don't like to confront that reality!

However, I want to point out that almost anyone hit with a series of Unfortunate Events (or one extremely extended Unfortunate Event) could find themselves in the OPs situation of using credit cards/potentially reaching into retirement funds. For example, one can imagine a circumstance where one started with a 6 month eFund, was laid off (spent 4 months of eFund), got a new job across the country (spent 1 month eFund to move), worked and started building up the eFund again, but then had some large unexpected medical expenses before one could build up the eFund again and had to use credit cards, etc.

One could argue that this is why a larger eFund is important, but we all have to balance our savings for emergencies, retirement, and planned expenses and for most of us, funding all of those is slow going, even if we do LBOM, so we do the best we can.

Best,

pachouly

p.s. Minxie, your interest rate is low and it sounds like you could pay it off in a reasonable amount of time, so I'd also advocate just doing that rather than taking from the Roth. Stop looking at the retirement accounts to reduce that 'antsy' feeling.
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This CC is my UPromise card so they pay me 1% on everything and the interest rate is at 5.15% so carrying costs aren't that much.

Remember that if you don't carry a balance, the entire 1% is yours to keep.

(I'm not advising you about whether to raid the IRA--just about controlling your spending.)

Vickifool
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Bingocards is only 26?!?!?! I feel like an even larger failure, both in my multi lingual, multi culturalism, and writing skills :(

Bingo, I am a fan, I hope you write a book of compilations of all your experiences in Japan. I wish you had a blog.

-Allen
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They won't be down forty years from now when you actually retire
++++++

Bingo:

Are you 100% there will be a stock market in 40 years (i am not saying I don;t agree with you...just making a point)
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They won't be down forty years from now when you actually retire
++++++

Bingo:

Are you 100% there will be a stock market in 40 years (i am not saying I don;t agree with you...just making a point)


If there's no stock market in 40 years, we'll have much bigger fish to fry than whether or not Minxie should've paid off her CC debt with her Roth IRA.

And, for that matter, I'm not 100% sure *I* will be here in 40 years. DH getting cancer at 36 made us both reexamine a lot of our assumptions about how much time we have to do certain things.


--Booa
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p.s. Minxie, your interest rate is low and it sounds like you could pay it off in a reasonable amount of time, so I'd also advocate just doing that rather than taking from the Roth. Stop looking at the retirement accounts to reduce that 'antsy' feeling.

Thanks, pachouly, and thanks for the rest of your post. I know what I need to do and had even planned for all of this but just needed a little shake to remind me NOT to touch my Roth. Heck, I'm the one usually advocating building a Roth and an e-fund. The stock market downturn just kind of got to me when I was updating my accounts' info due to my most recent move.

Minxie
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Minxie,

My advice would be, don't sell your Roth unless your retirement horizon has changed, eg. you have a terminal illness or some other reason. You are limited in your annual contributions to the Roth and you cannot easily replace them tomorrow if you sell today.

If your personal debt becomes a problem, it can be wiped out in bankruptcy, and you will get to keep your Roth in the process.
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>>
Bingocards is only 26?!
>>

Its like 90 in panda years.
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This CC is my UPromise card so they pay me 1% on everything and the interest rate is at 5.15% so carrying costs aren't that much.

Remember that if you don't carry a balance, the entire 1% is yours to keep.

Vickifool brings up a great point. If you are going to be paying down the debt on your UPromise card over, say, the next year, you should not be using this card to make any additional charges, until, at most, 2 months before you project complete payoff, including the new charges.

This is because, even at a 5.15% rate, if you charge something today, and don't get the card paid off for a year, you are 4.15% behind where you were if you had put the charge on a card that you were paying off on a monthly basis.

At a 5.15% annual rate, your monthly rate is about 0.43%. So with 1% back, you will pay more in interest than your reward is worth if you are paying interest for longer than 2 months.

So, until 2 months before the card balance, plus any new charges you intend to put on, will be paid off, you will be money ahead to use a different card.

AJ
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