In order to speed up the process of paying off my student loan I have cashed out part of my Roth IRA. Last year, I considered using my Roth IRA to pay down my student loan, but decided against it since I wasn’t sure I would be able to continue paying large amounts towards my student loan. Now that I have a stable source of income I decided to go ahead and use some of the money from my Roth IRA to pay down my student loan.
I know some people will think it wasn’t a smart move, but I will share my reasoning in deciding to use the IRA proceeds to pay my student loan. Since I took the money out of my Roth IRA I will not owe any tax or early distribution penalty on the money I took from my IRA. The amount I took out was less than the contributions I had made to the IRA. Since a return of contributions from a Roth IRA is not taxable this distribution will not subject me to additional tax. The benefit of using the IRA distribution is that it will reduce my student loan balance enough that I will owe less monthly interest on my student loans. Since I’m paying 6.8% interest on my student loan I am effectively getting a 6.8% return on the IRA distribution. I think that is a reasonable return.
Using retirement savings to pay a student loan can leave you short of money for retirement. I took out $9500 from my Roth IRA which I don’t think will have that big of an impact on my retirement. I’ll be turning 50 this year so it isn’t like the $9500 has decades to compound before I retire. Of course, it could also be argued that at my age with my meager retirement savings I need to be saving every dollar possible for retirement. That being said, I still feel that having the student loan paid off sooner will be more beneficial to me than keeping the $9500 in the IRA.
I do have a plan to beef up my retirement savings this year as well. Sometime around late August/early September I will become eligible to contribute to my employer 401k plan. My company allows me to contribute 100% of earnings to the 401k plan and that is what I plan to do. There is a limit of $24,000 that can be contributed to the 401k in a year. That limit won’t be reached since I’ll be starting my contributions late in the year. I’m guessing I’ll still get about $20,000 into my 401k though. That will make up for the $9500 taken out of my Roth and then some. The 401k money will be pre-tax which will also save me some money on taxes this year.
The drawback to contributing that much to my 401k is that I won’t have enough money to make any payments on my student loan during that time period. In 2018 I will reset my 401k percentage to one that is sustainable for that year which will allow me to continue making payments on my student loan. What I can save in my 401k in 2018 will depend on whether I’m able to refinance my student loan and what my required monthly student loan payments will be. For 2017 saving the maximum I’m able to in my 401k is what I think will be best for my finances in the long run even if it means it will take a little longer to pay off my student loan. What do you think is the best move when deciding whether to save for retirement or pay off the student loan?