Die, Roth IRA, die

April 7, 2010 7:58 AM

Get loans or cash out my Roth IRA?

My wife and I are currently finishing up masters' programs overseas, and we're about to enroll in a summer non-degree program in the states that we don't have the money for. We're applying for private student loans (Federal is apparently not an option for non-degree-granting-programs) to cover the costs of this program. We also have some credit card debt, and we're not yet making enough to pay all of our expenses to get us through the coming (and possibly final) year of grad school overseas. Here are some numbers:

Current Credit Card Debt: $3000
Tuition/Expenses for Summer Program: $5000
Additional $ that would keep us above water for 2010/2011: $5000-10,000

Now once upon a time, we weren't starving students, and we've socked away some money into Roth IRAs. I have $16,000 and my wife $4000 or so. These amounts are close to if not below the principal that we put in (thanks, economic slump!). The internet is abound with people advising the use of a Roth IRA as an emergency fund.

So, as this is the year that we would be needing to go into debt, should we cash out our Roth IRAs instead?

(Note that we can get a student loan for the summer for about $6000-8000 at 5-10% and are currently applying for as much as they'll offer, and seeing what interest rate and amount they end up offering.)

posted by sdis to Work & Money (5 answers total)

I think the answer really depends on whether your student loan interest rate is at the bottom end of your range (5%) or the top end (10%). 5% is a reasonable return from a Roth IRA, 10% is probably not.
posted by jckll at 8:27 AM on April 7, 2010 [1 favorite]

Well to me the obvious answer is to delay going to the summer program until you've saves up more. But if you absolutely must go spend that kind of money (will it really pay off?) I would take the IRA money. Can you do the summer program part time and work?
posted by WeekendJen at 8:38 AM on April 7, 2010

I agree with jckll, it's kind of a toss-up and depends on what actual interest rate you are offered. Also, you may end up getting some of your loan interest payments back via deductions at tax time, but only if you don't take the standard deduction and don't make more than the income limits.

Personally, I think using the Roth IRA to pay your expenses is "safer", in that you are avoiding a known loss (interest payments), and aren't getting locked into a set payment plan (and risking credit score dings and increased fees if you miss payments), whereas you are only giving up unknown gains from your tax free investments (which a decent guess might be around 8% annually). I would only recommend this if you are going to be serious about filling your retirement accounts back up once you finish school though, rather than just spending the money that you would have paid in student loan payments. Also make sure that in any case you still have an emergency fund of some sort for unexpected expenses before you are out of school.
posted by burnmp3s at 8:58 AM on April 7, 2010

I would pay off the credit card debt immediately with the Roth IRA money and stop using the credit card. Depending on the interest rate, you're probably paying $300+ to service that debt each year.
posted by euphorb at 5:13 PM on April 7, 2010

What is the justification for doing this summer program as opposed to getting some variety of paid internship? I understand using Roth IRA as a "emergency fund," but I am not seeing any way that a voluntary summer program would count as an emergency.

Going into more debt sounds like a bad idea, and for that I would suggest using the Roth money before taking on more debt, but either way I would say it is smarter to just not spend the money in the first place.
posted by that girl at 5:52 PM on April 7, 2010