Reader Mail: Should I Borrow Money from Retirement?

I’ve currently got two credit cards with balances: one with $5,500 (interest rate is 9.9%) and one with $1,700 (with a 20.99% interest rate). I’ve got about $4,000 in my Roth IRA, none of which is invested. I’m trying to figure out if it’s worthwhile to withdraw the $1,700 from my IRA to pay down the higher-interest credit card and focus all my monthly payments on the lower-interest one. I’ve always been told “never borrow against your retirement,” but it seems that this might be a good idea. Help?! — N.C.

I’m not such a huge stickler to following rules of thumb to a T, but I can’t tell you whether or not borrowing from your Roth IRA is something you should consider doing unless I have a little more information from you.

Let’s start with the reasons why people say you shouldn’t borrow money from your retirement plans. The first, and most obvious, is that you’ll pay penalties for withdrawing earnings from your Roth (you mention that the money in your Roth isn’t invested in anything—some recommendations for starter funds are here).

But, you’re allowed to withdraw the money you invest in a Roth at any time without a penalty, so you may not have to worry about this. Other less obvious reasons you shouldn’t withdraw money from retirement is that the point of putting money there in the first place is to earn more money over the long term, and you won’t do that if you remove money from your account. You also don’t want to set a precedent of borrowing from retirement and have this borrowing become a frequent habit.

Okay, so let’s talk about why withdrawing $1,700 (penalty-free) from your Roth might make sense for you. That 20.99 percent interest rate is pretty burdensome, and depending on how much of a dent you’re making on that balance every month, you might be getting slammed by the accruing interest on your credit card. Considering that the average annual compounded rate of return for Roths is about 10 percent (based on figures from Jan. 1970 to Dec. 2009), it would make a lot of sense for you to withdraw money from your Roth and eliminate that debt. The tricky part is making sure that debt remains eliminated. Cut up the card, or close the account.

And here’s where I need more information from you. I don’t know how much you make. I don’t know how much money you’re throwing at your credit card every month. If you’re paying down the balance on your card by hundreds of dollars every month, and can just eliminate the debt that way—great, stick with it, you don’t need to borrow money from retirement to pay off that debt. If you’re paying off a little bit of the principal on your card every month, I’d definitely consider withdrawing $1,700 to eliminate that high-interest debt. Just be sure to budget out a way to make up for the Roth withdrawal, and try to max out your Roth contribution for the year.


More Reader Mail

Photo: PhotoSteve101


1 Comments / Post A Comment

john cliton (#7,272)

Good Day I am John cliton from United state of America, i stayed in Alabama, and i have a broke up business, until i found this company email who help me to gain a loan for business, and now i want to used this short medium to congratulate the company for the fast and safe money they loan to me without any form of collateral, i loan 98,000.00USD form the company to save my business and lots more, i saw their mail on the internet, everyone always give testimony for what they did, so i quickly contacted them and they all did everything for me without stress and my money was sent to my account 24hrs later, i was surprise and feel glad, now i now have a standard business control agent who help me, now i will advice those who need urgent loan to contact them at he is a very Good man and I know that he will help you immediately.

Comments are closed!