Borrowing from a Roth

[Guest calle_betis]

I have a stupid question. I am 38 and trying to pay down debt so I can start saving for retirement.

Presently, things are tight with the mortgage and a small HELOC, 1 car payment, 2 kids in preschool, 2 529's.

I opened a Roth in '98. I have about $12K. I have a credit card for 5K at about 13%. I am wondering if I can borrow 5K from the Roth to pay off the card without the penalty, being that the Roth is 5 years old +.

Thanks for any explanations.

[Guest Advisor56]

Borrowing from a Roth would be considered a withdraw and would then be subject to the 10% penalty + any viable tax implications. You could take the money out but the penalty and the taxes aren't worth your 13% credit card rate.

[John G]

You can not borrow from a Roth. You can take out contributions (not earnings) without a direct penalty. Indirectly you are penalized because you are eradicating some of the value of your personal tax shelter.

You might want to consider a couple of other options. First, you can roll your credit card debt to another card and utilize a 90 to 180 day grace period on interest rates. Second, you could start directing discretionary savings towards rapid payoff of the credit card debt. Third, someone in the family could take a part time job and devote all of those checks to erasing the credit card debt.

All of these steps might be preferable to drawing funds from your Roth. But, I am just giving you some creative options because you did not provide much in details about the terms of your debt and how much free cash you have each month.

I am very concerned that you did not mention anything about your cash reserves. It took me a while to realize that HELOC probably means home equity line of credit. The picture you paint seems to translate into no cash reserves other than the Roth and you are spending beyond your means. I don't mean to nag, but this may be the most fundamental problem you face. If you don't throttle back on spending, all your plans will be for naught.

I grew up in a family where we rarely did the expensive things like own new cars, take flying vacations, eat out a lot (we were more likely to picnic at a rest stop then stop at a restaurant, stay in hotels (camping was the preferred method of seeing the country), or costly entertaining. We bought things on sale, traveled off peak and learned to negotiate everything including hotel rooms. My folks did careful pruning which left enough money for all the important things and a little for the fun things. No one felt deprived because all the essentials were covered and lower cost substitutes were stimulating.

While as an adult, I can now afford to do almost anything such as international travel and two homes, I still enjoy a good P&J or tuna sandwich. I enjoy camping. I am more likely to visit a National Park or the local library than Disneyland or Seaworld. My wife and I got a head of the curve early, avoiding car loans and credit card debt. We don't spend money to impress our friends (many of whom are in debt because of flashy spending habits). We use 15 or 10 year mortgages. We buy off season. We rarely buy anything that is not "on sale". We often buy in larger lots (cases of wine, OJ). We buy new cars for cash and keep them for ten years. We take reasonable career change risks. And, we have always invested for the future. In the 30 years since college, we have been essentially debt free and building retirement and taxable assets. We have put two kids through college by paying about 85% of the out of state cost, they paid 10% and picked up a few scholarships. Our kids did not get new cars when most of their high school friends got them... few survived the first year and our kids now better understand money matters.

Budgets are boring, but you may need to do the mechanical process of tracking your spending to see where it all goes. I would not recommend opening up the Roth to solve what appears to be a bigger problem.

I hope this helps.

[Guest calle_betis]

Thanks for the advice. You guys validated what I was thinking.

JohnG, thanks. The HELOC paid for my wife's extended maternity leave. One car is 8 and paid for. We are normally pretty good with $. I had other reserves and then I paid for my wife's eye surgery ($3K)and then we accidently double paid the mortgage . I paid online and my wife forgot that I had done that and paid via snail mail. There was a 5K swing. We'll dig out and get back on track. Normally, we're OK. Thanks again.

[John G]

Ah the dangers of trying to respond to a question when you are only aware of a limited amount of info. I appreciate how things can bunch up on you.

Your mortgage company may mark the extra payment as the next payment, or count it as a reduction in principal. It may even be your choice as to how to count it, so it is probably worth a call.

Also, the first response must have been posted while I was typing my response. There is a distinction between withdrawing contributions or earnings in a Roth. There are no penalties or taxes owed on withdrawals of the original contributions to a Roth.