I am thinking of withdrawing all of my money from my Roth IRA as of now. I currently only have a balance of $2536 and have only $283 in investment returns. I know, how there will be some taxes considering I only had the account for 2 years. I am currently only 21 years old and I want to pay off my loans ASAP. I have an emergency fund, have a decent job, contributing to my Roth 403b plan. I am figuring that I don't plan on contributing to my Roth IRA any time soon since my employer takes it out of my paycheck anyways. With the given circumstances, is it wise/financially a better move to keep the money in the Roth or to take it out so I can get out of debt a lot sooner and to be able to have more money in the future? What are some of the other pros and cons that I have missed.
This question is a variation of your recent Should I use 3k on my personal loan to get out of debt?
From that question, we know that you have a $1000 Emergency Account. From countless articles, this is more than half of what most people have available to them. Good job there. But $1000 is still just a tiny amount compared to what I consider an emergency. I understand you are 21, and I need to offer an example that's not about a homeowner with multiple things that can cost $5000+, so here's one -
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You've also disclosed that you are already able to pay $1000 towards the $18,000 debt. I'd stay with that plan.
You ask about the cons of killing the Roth.
50 years of 7% post-inflation returns will turn that $2536 into $75,000. This is a full year's spending for an above average budget. That's why you should keep the Roth. Don't get into the habit of tapping the retirement account for anything less than a true emergency.
What conditions would you have to offer for me to say "go for it"?
- If the debt were high (10%+) interest, and your planned payoff were years off.
- If the company plan were highly matched and you struggle to deposit to the match. (these 2 are what comes to mind right now)
I would first ensure that you have solved the problem that resulted in the debt in the first place. Typically it a symptom of spending more than you bring in, which is NOT going to be solved by cashing in retirement, and you'll be back in the same spot in another two years.
If your information is correct, you have $2,253 in contributions and $283 in earnings in your Roth IRA. So your rate of return is somewhere between 6% and 12% depending on if your contributions were made all up front or evenly over the last two years. At 6%, in 40 years (retirement age) that will grow to $22,000+. At 12%, it will be over $200,000.
From a tax standpoint, you can withdraw your contributions without tax or penalty, but you'll be missing out on the future gains of that $2,200.
My first choice would be to make sure my budget and spending are solid, and would first look for ways to temporarily cut my budget (including 401(k) if necessary) to pay down the debt. That way, you get to keep the future earnings of the Roth and aren't just fixing the symptom and have the same problem in another two years.
EDIT: Since Joe pointed out the original question I see you're at least looking at Dave Ramsey's baby steps. I believe that my proposal is in line with his plan - get on a budget first to control your expenses, then stop all retirement savings temporarily to aggressively pay down debt. I doubt he would recommend cashing in retirement (even tax-free retirement) to pay down debt.
Answer: Keep the money in the Roth IRA and create a plan for paying of your debts.
Reasoning: Withdrawing will incur withdrawal fees on the gains (fees vary depending on when your Roth was opened). Leaving the money in there will allow your money to grow tax-free and then be withdrawn tax-free when you’re in retirement (or qualified expenses).
When was your Roth opened?