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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.

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    The key is to get on a budget, cut spending to nothing and get a second job. Be done with the 18K in 12 months. You can do that. Leave your ROTH alone. – Pete B. Jul 30 '18 at 17:19
  • Would withdrawing the $2253 in contributions be enough? You can withdraw $2253 at any time without any tax or penalty, no matter how many years your account has been open. Early withdrawals (i.e. before you are age 59.5) of the $283 in earnings, however, will have both tax and penalty. So if the $2253 is enough, just withdraw that and leave the $283 in the Roth IRA. – user102008 Jul 30 '18 at 18:16
  • @user102008+ nit for the record: distribution of Roth IRA earnings is subject to tax and penalty unless (1) you are 59.5 or certain special cases like first-time homebuyer or reservist apply (apparently not in this Q) AND (2) the Roth IRA has been open at least 5 calendar years (definitely not in this Q) – dave_thompson_085 Feb 1 at 21:48
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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 -

According to Transmission Repair Cost Guide readers, the average cost of transmission replacement ranges from $1800 to $3400. A used/salvage transmission ranges from $800 to $1500, a rebuilt transmission from $1100 to $2800 and a remanufactured from $1300 to $3400.

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)
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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.

  • D - see the question I linked in my answer. A lot of detail already disclosed. – JoeTaxpayer Jul 30 '18 at 15:18
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    D - You know I respect your opinion, but I disagree with the update. The debt is 3.725%. And OP is on track to pay it off in 18 months. Why cut back on long term savings to do this? If anything, I'd ask if he's maxing the plan, and if not, deposit even more to his company plan. What I didn't see in his prior questions was what match, if any, the company offers. That should be considered as well, for both our positions. +1 for a well articulated answer. – JoeTaxpayer Jul 30 '18 at 16:03
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    @JoeTaxpayer I appreciate it, and I can certainly understand not stopping the 401(k) (assuming that's your disagreement). My intent was to focus more towards cutting the budget to reduce spending, and cutting the 401(k) would just be an optional nitro-boost. I'm also echoing what The David would say (though I don't always agree with him either). – D Stanley Jul 30 '18 at 16:27
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    No, OP was talking about taking out $2253 (contributions) from the Roth. It will grow to $22K, we hope. – JoeTaxpayer Jul 31 '18 at 15:26
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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?

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