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Currently I have a traditional IRA that has about $3,000 in it. It was rolled over from a 401k two years ago and has been sitting ever since (due to various reasons). It's not making any money and I'm pretty sure it's only lost money since I started it. I currently have a Roth IRA (with another bank) that I max out every year, so I have no plans to contribute to the traditional IRA again (at the very least, not for another 10+ years). In addition, I incur a yearly fee of $100 just for having the account open. Finally, I have student loans totaling about $7,500 that average about 5.5% interest. I'm making a hard run at the loans this year — I'd like to have them paid of ASAP.

Given all of that, should I cash out the IRA to put it towards student loans? I'm in the US and I'm in the 25% tax bracket, so after taxes and the 10% penalty, I'm guessing I'll get around $2,000 cash. That is quite the penalty, but considering that the money will be sitting for many years to come, and that I have loans accruing interest, it seems like it might be a good idea. Does this decision make financial sense?

Note: I'm aware that there are similar questions to this, but I feel like this one is a bit unique for two reasons:

  1. I don't plan on contributing to the IRA any more.
  2. The account has been losing money since I opened it.
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    Why don't you roll it over to the Roth IRA? – littleadv Aug 11 '15 at 16:51
  • @littleadv, wouldn't that go towards my yearly $5,500 limit (which I've already hit)? – GJK Aug 11 '15 at 17:11
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    no. conversions don't count to the limit. – littleadv Aug 11 '15 at 17:43
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If you were going to pay off an 18% credit card and had no hope otherwise, I might agree you should do this. 5.5% student loan, I wouldn't do it.

You have multiple issues going on. I would find a bank or broker that will keep the IRA with no fee. Zero. If you buy stocks, there might be a commission, but I'd stick with a low cost index mutual fund. At 10%, the account might double every 7 years, even 35 years till retirement offers 5 doubles or 32X your money. Literally, $100K more for retirement. As a semi-retired old guy, I thank my younger self for putting aside the $3000, so we have over $100K more now.

Your student loan is manageable. Save, enjoy yourself, but don't let $7500 at 5.5% keep you up at night.

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    I honestly wasn't aware that there were banks that didn't charge annual fees for IRAs. (Shows how much I know.) I think that's the route I'm going to go down. Transfer it, throw it in an index fund, then just sit on it. – GJK Aug 11 '15 at 17:17
  • 10% compounded/year in an index fund is far from certain - the past 15 years have been a real rollercoaster, and if you'd been invested fully for the entire time you'd be doing OK, but still under that 10% yearly average. Not suggesting that your advice is wrong, but don't promise future results based on past performance, especially for any given 35 year window. – Jason Aug 11 '15 at 21:57
  • ... to follow up on that, however, I completely agree that finding a lower cost way to stay invested is a far better use of that money than using it to pay down a low interest loan. – Jason Aug 11 '15 at 21:59
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    The 35 years from Jan 1980- Dec 2014 returned 11.87% CAGR. The $3000 would have grown to $152K. That period had 3 crashes, one of which was called a near depression. Had the CAGR somehow been just 8%, I'd have $44K, and would still be thankful to my younger self. In my answer, I wrote "might". But, I'll agree with you, I should be more clear. By the way, take care of your knees, your older self will appreciate that, too. – JTP - Apologise to Monica♦ Aug 11 '15 at 23:31
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If the IRA is costing you $100 a year, you should almost certainly transfer it to a cheaper provider, regardless of whether you're going to withdraw anything. You can transfer the IRA to another provider that doesn't charge you the fees. Or you can convert it to Roth and combine it with your existing Roth. Either way, you will keep all the money, and save $100 per year in the future.

If you want to take money out of your retirement accounts, you should take it out of your Roth IRA, because you can withdraw contributions (i.e., up to the amount you contributed) from the Roth without tax or penalty.

Whether you should withdraw anything from your retirement accounts is a different question. If you're already maxing out your Roth IRA, and you have sufficient retirement savings, you could just instead plow that $5500 into your student loans. (If you can afford it, of course, it'd be better to just pay the $7500 from your income and still contribute to the retirement accounts.) There's no reason to withdraw from retirement accounts to pay loans when you could just divert current income for that purpose instead.

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I would do a Roth Conversion and put it at the same place where the rest of your Roth funds are before withdrawing it.

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  • Could you add some detail about why this might be advantageous? – bdesham Aug 11 '15 at 21:17

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