I’m doing something a little different in today’s Wednesday Debt Discussion by fielding a reader’s debt-related question. Since many of us are experienced in this arena (that’s nicer to say than “deep in debt”), I thought it would be helpful to let everyone give some input. Here’s the question:
I’m in school for my undergraduate degree. My wife stays home with our two children. We live simply, but I don’t think we’re going to make it through school without needing to borrow some funds. We have some money saved up in a Roth IRA. Do you think it’s better to borrow at +/- 5% for a subsidized loan or pull money out of our Roth IRA? The interest on the loan doesn’t start until I graduate. I believe I can pull contributions from the Roth IRA w/o penalty. Our Roth IRA has given about 7% since inception.
What do you think?
- What advice would you give Jon?
- Should Jon dip into retirement savings to pay for school?
- Would going into debt be a better choice?
So we are also working to become debt free as well. We use Dave Ramsey but like most of our friends you have to tweak it to work for your family. We recently took out the contributions from our Roth IRAs. The Roth rules are the account is open for 5 years. At the beginning of the 5th year you may take your contributions with no tax (you’ve already paid it once) and no penalty. Both my husband and I have done well in the market and still have money earning in both plans. By doing this we have shaved off nearly 18 months of mortgage payments. While you are considering this option I think you have to weigh it with your spouse and determine your comfort level with debt or loss of retirement planning.
I would not pull from the IRA. If money is becoming enough of a concern that you’re considering drawing from the IRA, it’s time to reconsider how much money is funding the IRA. It’s also time to re-evaluate the entire budget. (In fact, I think a budget should always be fully reviewed every 3 months.)
Your wife is a stay-at-home mom. Are there opportunities available to her that can supplement the income that don’t compromise the values and vision you have for your family? In our area, we have plasma donations that pay $75/week. That may not seem like much, but it’s enough to fund one of our budget categories completely. (It also forces us to be conscious of our health so we’re always approved to donate!)
Can you get creative with bartering services? We have friends who are very mechanically inclined. My husband is very technologically gifted. We swap services – my husband will take a look at computer/camera/phone issues and her husband will check out minor car issues for us.
Last question – have you applied for all scholarships you are eligible for? Student services and/or your advisor should be able to help you identify potential scholarships. When I went to school, people laughed at me applying for $50 and $100 scholarships, but when they saw how many I was awarded, and what the final total was, they realized I made a smart decision. Even one text book fee being covered meant that I didn’t need to figure out how I could come up with another $80.
I wouldn’t borrow from your Roth IRA. You will end up paying a 10% penalty tax. If you need extra money right now, I would stop contributing to your Roth IRA (if you haven’t already). Also, check out Dave Ramsey. He has a lot of good advice and free resources on his page.
Actually, there is no penalty with a Roth IRA, and the money was already subject to tax before it was put into the account. (Money in a Simple IRA is subject to a 10% early withdrawal fee in addition to standard income tax as it has not already been taxed.) That’s the beauty of a Roth IRA – you can withdraw the original investment amount without tax or penalty at any time (or the full amount in the case of a down payment for a house or tuition).
I would suggest using the Roth IRA to pay for school. That way you will be graduating from school with a clean financial slate, which will be an immensely empowering feeling! While your investment might be earning 7% now, that’s not a guarantee. A good rule of thumb is to never have money invested at an unguaranteed rate that you will need to use within the next 5 years.