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I am 28 years old and in nursing school full time. I will graduate in May with my RN. I have about $10,000 in credit card debt costing about 20% interest and I am only able to make the minimum payments each month.I was just made aware of an old Roth IRA account that has about $8,600 dollars in it. I have no student loans and would like to be debt free when I graduate.

My question is should I cash out this Roth IRA to pay off my credit card debt, then start adding to my Roth IRA again after I graduate?

  • Are you currently emoloyed? If not, could you take on a part time job? – Charles Fox Sep 19 '18 at 1:15
  • So the consensus is to do it or at least take part of it out to put a dent in this overwhelming debt? I have a part time job now during school but it barely covers the minimum payments and living. I feel that at 28 and with a much more stable and profitable career ahead of me that I can make this loss up in no time. Right? – LBEB45 Sep 19 '18 at 4:42
  • @Lauren - please use just one ID. You asked the question under one member name, but comments with another. Do you prefer the ID that's not a real name? I see that's the one that's 'registered'. – JoeTaxpayer Sep 19 '18 at 12:39
  • @LBEB45 Exactly, RN's are in high demand and paid well in many cities, coming out of school almost or completely debt-free is great, if you keep living like you are now for a while after earning considerably more you can quickly make up for a little lost earnings in the retirement account. – Hart CO Sep 19 '18 at 14:18
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You can withdraw your contributions to a Roth IRA at any time with no early withdrawal penalty and no income tax (you already paid tax on Roth IRA contributions), but there's a 10% early withdrawal penalty for any earnings that you withdraw early and income tax on those earnings as well (there are exceptions but they don't apply to your situation).

I think it's worthwhile to withdraw the contributions, they are likely the bulk of the balance in the account, so that will make a nice dent in your credit card debt and offset substantial interest given your 20% rate. If you consider it a loan to yourself and focus on re-building your retirement savings as soon as possible once you've graduated then you'll be in good shape.

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I would also focus on why you have $10K in credit card debt in the first place. Obviously you were spending more than you made, which is understandable for a college student, but before cashing in any retirement I would make absolutely certain that I'm not going to incur MORE debt after paying both a penalty and eliminating the growth potential of the investments.

I would first either reduce your expenses or increase your income so that you're not adding more debt. To do this you need to stop using credit cards so that you are not tempted to spend more than you make. Even debit cards would be dangerous for the time being as overdrafts will be very costly.

Once you get a full-time job, stay on that level of spending until the cards are paid off. As a full-time RN that should be only a matter of months.

If instead you want to cash in retirement funds, you should STILL work out a budget that ensures you don't take on more debt, and once you work full-time then you can quickly build that retirement account back up.

Bottom line - yes, you can cash out the Roth and it would help the short-term pain, but I would ONLY do so if I made sure I had my spending under control. Otherwise, it's entirely possible you'll have another 10K in credit card debt soon after you graduate, with no magic retirement account to bail you out.

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I wouldn't advise borrowing against your future self to cover current expenses.

First that $8,000 is going to be less after a 10% tax penalties (on earnings only, not contributions), plus it will count as income further reducing the net amount you can use to pay down debt.

Second, do you realize that if you leave it invested and get typical 7% annual returns on that IRA account it will be $97,788.95 by the time you are ready to retire at 65? Do you really want to spend almost $100k now to wipe out a $10K debt?

Third, you need to think of it as borrowing from your retired self, who will likely have a fixed income and less desire to go back and work to get extra money. You are better off working extra to pay the debt now while you are young and have an easier time doing it.

Fourth, it is easy to start bad habits thinking of your retirement savings as an emergency fund. Better to instill that discipline in yourself now.

My suggestion would be to cut back on spending and find a side gig to pay of the debt. Don't touch retirement funds except in an extreme emergency where you are going to die or be homeless.

Editing my answer. Didn't notice it was a Roth

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    I can play that game too -- a $10K debt at 20% interest would theoretically compound to an $8.5M debt by age 65. It is apples-and-oranges to compare $100K decades from now to $10K today. This would say that no young person should ever spend anything because the price (in future retirement funds) is 10x the actual price. Actually, having something now is more valuable than having the same thing later, and this is the reason investments offer positive returns. – nanoman Sep 19 '18 at 0:35
  • You took the words right out of my mouth nanoman :->) – Bob Baerker Sep 19 '18 at 2:53

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