Question: Should I cash out a Roth IRA to pay a student loan?

How are you paying for college?

I'm 29, finishing a Master's program in Rangeland Ecology and Management. I'm down to thesis writing, so I haven't been a full time student for a bit and my student loan grace period is up.  I have about $40,000 in student loans, APR 6.8%.  I have no income at the moment, but I'm optimistic that I will be finished with school and have a job by May.  So I'm not worried about making minimum payments, possibly making big payments depending on the quality of the job.

Thing is, I happen to have about $17,000 just sitting in a Roth IRA.  Does it make economic sense to be sitting on this when I have a sizable debt?

The student loans are the only debt I have.

-Chris

Response:

I would leave the Roth-IRA alone. By the way, congratulations on having such a healthy sum of money in a retirement savings account.

The money in the Roth should continue to grow and, when it’s finally time to retire, you’ll be able to withdraw the gains tax free. You don’t want to lose the advantage of allowing your retirement savings to compound over a long period of time. Compound interest is what Albert Einstein called the “most powerful force in the universe.”

An additional advantage of the Roth is that it can also act as an “emergency” emergency fund. Since the money that goes into a Roth is aftertax dollars, in a pinch you can always withdraw your contributions tax-free and penalty-free. Just don’t tap any of the gain. Any gain withdrawn early is taxable and comes with a financial penalty.

Your student loans have let you use OPM-- Other People’s Money -- to fund part of your education. The loan has allowed you to get your education quickly and the various repayment plans give you some flexibility going forward. You’ll pay the loan off from the return on the investment in your education. I would pay the loan off as fast as practical, but I wouldn’t touch retirement savings to accomplish that goal. 

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