Robbing my Roth IRA

[rd200]

Yes, you read correctly, i want to cash out my IRA....

Here is why. We have been saving money to move out of town and to the country. In the area we live in, country properties/farms go for alot of money. esp. if there is a few acres attached(which is what we want) anyways, we have about 17K in our savings acct right now. We have a truck loan out on our truck we bought last year and im paying an extra 200 month on it right now to get it paid off sooner. Well, it really bugs me that we have all this money sitting in savings when im paying 5% interst on our truck loan for 15K!!! So i want to take 15K out of savings and pay the truck off. Then the only debt we would have besides our mortgage is we owe our MIL about 13K. She loaned us the money for our adoption. (which isnt cheap)a few years ago. With the amount im paying her back we will never get it paid off. So, i really was thinking that we could take the 2k left over from savings, and i have 5K in my roth IRA and that would make 7K. If we paid her that 7K, when tax time comes, we are gettting back another 5800 from our adoption tax credit. That would pretty much almost pay her off. and i could find a few hundred extra dollers to pay her every month until then because the truck would be paid off. Then we would be free and clear and start over in a nice country property where i plan on broodening my self sufficiency skills. I do minimal right now because we dont have the room to get animals, have a large garden right now. Anyways, It sounds really really dumb to cash out my IRA, but im only 28, DH is 30. 2 kids. DH is going to have 2 pensions after he retires from the military. He has 13 years in the US army reserves and at his civilian job (which is also thru the military) he has 7 years in. after 20, he earns his full pension benefits. So, im not too concerned about retirement right now. He also has 7% of his pay going into his retirement acct and the gov. matches 5%.

So, is it really stupid to cash it out when it can help eliminate my debt?? I HATE having debt!! We would be left with only 1500Cash that i have in my sock drawer right now for an emergency fund, but on the other hand, we can save up money really quickly once we have all that stuff paid off. we will free up $700 month by not having the truck payment and payment to my MIL. DH doesnt think its a good idea to pay this stuff off. He wants to just save it all for the new house.

Oh yeah, and we are getting a VA loan, so we dont HAVE to have a down payment. we ideally would like to have at least 10% down, + Closing costs, but if something came up and we didnt have that much we wouldnt NEED that to buy the house.

Any thoughts??? Its not like the stock market is doing crap.... might as well take my money out before I loss more of it....??? Thanks, Rach

 

[FarmerChick]

a loan OR total cashout.

cause you sure won't be adding $7K to that loan. take away about 55%-60% and that is the total you will be left with.

Govt is going to hit you with penalty 10% right off the bat.

Then you pay tax on that money just like it was any old income. Because it was tax free before you put in the cash, you now have to pony up the back taxes.

Then that $7K is added onto your income for the following year because it is income now instead of an IRA


YOU WILL LOSE big.

So if there is any way around it I would not cash out.


It all comes down to you 'wants' vs. 'needs'. Is it you 'want' to move right now or can you wait because it is not a need yet?

So if about $2800-3000 is worth it then go for it. having those pensions for the future is always a great thing. (as long as the govt. decides to keep paying them)


hope that helps a bit. It is hard juggling money. I drool over our 401K plan all the time but I am way to cheap to give them any of that money earned...lol

 

[rd200]

Hmmmm.... I always thought with a Roth IRA, you could take out the money without penalty??? Geez, i guess i thought wrong then. Yeah, if i have to pay a penalty, and then taxes, No, i wont do it then. I wont end up with much at the end.

we do really "need" a new place. We have outgrown ours very quickly after we adopted our son, and we have been waiting to move for a few years now. Trying to save up the money. Our other son is 10 right now adn we desperatly want to move before he gets much older because moving to a new school district when you are in 7th or 8th grade is a nightmare. trust me. He isnt very good at making friends the way it is and he's went to school with these kids for years now. Anyways, that sucks, i thought it would be an easy soluiton to my debt problems.

 

[FarmerChick]

a Roth

you are right, it does treat you a bit different. I believe you are right about no penalty...but those 2 sets of taxes will kick in definitely.



oh yea I look at my 401K and think, if only I could get my paws on it NOW....lol...it would 'fix' a few things.



but you know....sometimes the loss of a chunk of that money is worth it if you 'can take that gamble' of truly being able to start saving up again. because you are young and do have alot of time to bank again.


sometimes putting life on hold is not worth XX amt of dollars (even if they are going to the govt)

You and hubby truly need to decide a plan. Sit and chat and decide if that Roth stays or goes....then run straight into the future with that plan you set up!!!

 

[FarmerChick]

well since not sure I looked up Roth....might be a penalty




Roth IRAs
Roth IRAs withdrawals are hit with a 10% penalty if you cash in before age 59 and lose itheir tax-free status. However, there are ways to get money out of a Roth tax- and penalty-free.

You can reclaim contributions at any time and at any age, without fear. Only earnings are subject to penalties. And Congress said that the first money coming out of Roth IRAs will be considered contributions.

But, money that is converted to a Roth must generally stay in the account long enough to meet the five-year test -- that is, for four calendar years after the year of the conversion -- to avoid the 10% penalty.

Example: In 2000, a 30-year-old converted $20,000 to a Roth IRA. The five-year test would be met at the end of 2004, so at age 34 the investor could withdraw the $20,000 tax- and penalty-free.

Roth earnings
So, how are Roth earnings taxed? Earnings are tax-free if you pass the five-year test and meet other tests:

You are 59 or older at the time of withdrawal.
The money is used for a first-time home purchase (up to the $10,000 limit).
The money is distributed after you become disabled.
The money is distributed to your heirs after your death. If you die before meeting the five-year test, heirs would have to wait until the year you would have passed that test to withdraw earnings tax-free.
In other instances, failure to meet the five-year test guarantees that your earnings will be taxable, regardless of your age, even if the earnings escape the 10% early-withdrawal penalty. For example, whether or not the five-year test is met, withdrawals at any age to pay qualifying college costs dodge the 10% penalty. But the earnings will be taxed -- unless you're older than 59 and meet the five-year test, in which case earnings can be withdrawn tax- and penalty-free for any purpose.


HOPE that helps a bit. good luck

 

[myzanya]

we don\t have roths or ira's in canada...but I still would like to put in my 2 cents...worth
the money..that you were saving is for your future...and what you want to do is set up your future...
it isn't like you want too gamble and waste it all away...
It is nice to hear how responsible and respectfull you are..in paying back your mil...
and the thought of working towards free and clear...
but farmerchick is right as it would be wise to know the penalties...
I know what you are going through...
we sunk all our savings into this place..by by bank acount....my hubby..is working hard so we can live my dream of free and clear house...
but UUGGHH the tax bill...
best of luck 2 you

 

[Marianne]

My understanding with Roth is that you paid tax on the money before it went in, no tax on it coming out.

I'm kind of like you in a way. It sucks to work, hang on, hoping that things will work out years and years in the future when you could be living your dream right now. Real estate probably won't get any cheaper (depends on the area and economy, right?), paying interest is still paying interest.

But then there's the loss of 'potential' income. It's a tough decision with lots of variables. A few years ago we took out a big chunk of money to pay off debt and never regretted it. We were paying a lot more in interest than what we were gaining. But as they say, your mileage may vary. Research, research.

Good luck with your decision! Here's something that may help: http://www.smartmoney.com/retirement/planning/tapping-your-ira-penalty-free-7958/

 

[Lesa]

I have some money in a retirement account- and I had the bright idea to cash it out, to pay off credit card debt. I called the financial planner that "invests" the money for my employer... When he explained all the penalties and taxes, the money just about evaporated into thin air. I chose not to cash it in- and eventually have paid off all debt. It seems like forever, but you can do it.

 

[FarmerChick]

that is what worried me Lesa.

I haven't had the numbers done, but when I try to figure it out it is horrible what you lose.

and then I am worried I under calculated LOL


you are right. It evaporates straight to the goverment somehow :/

 

[~gd]

a loan OR total cashout.

cause you sure won't be adding $7K to that loan. take away about 55%-60% and that is the total you will be left with.

Govt is going to hit you with penalty 10% right off the bat.

Then you pay tax on that money just like it was any old income. Because it was tax free before you put in the cash, you now have to pony up the back taxes.

Then that $7K is added onto your income for the following year because it is income now instead of an IRA


YOU WILL LOSE big.

So if there is any way around it I would not cash out.


It all comes down to you 'wants' vs. 'needs'. Is it you 'want' to move right now or can you wait because it is not a need yet?

So if about $2800-3000 is worth it then go for it. having those pensions for the future is always a great thing. (as long as the govt. decides to keep paying them)


hope that helps a bit. It is hard juggling money. I drool over our 401K plan all the time but I am way to cheap to give them any of that money earned...lol