using roth ira to pay car off smart way.

[investingnoob]

Ok I only have $6k in roth ira.
I have $4800 left on car @ 5.24%.
I can't afford to add to my roth due to me buying a house alone and have little to none left over after bills.
Im only 22, I figure ill have a decent retirement with my 401k+pension. And plan to get back to my roth down the road.
It seems paying my car off with it is better, doubt that 6k will out grow the 5.24% interest my car charges.
What do you guys think? I know this is against what we all believe but thought id ask.

[disneysteve]

Originally Posted by investingnoob

I can't afford to add to my roth due to me buying a house alone and have little to none left over after bills

I can't help but wonder if you are truly able to afford the house you are buying.

As for your actual question, no, I would not cash out a retirement account to pay off the car loan. Retirement accounts are for retirement - period. The only time I would ever consider dipping into retirement money would be in the event of a catastrophic emergency after all other funds have been depleted.

I would also fully expect that my retirement money will outperform 5.24%/year in growth.

[jIM_Ohio]

If you believe you are against taking money out of a Roth, why even pose the question?

In 5 years you would have

a) a paid for car which is getting less in value every day
b) no money in Roth because you cashed it out

In addition this needs looking at

I can't afford to add to my roth due to me buying a house alone and have little to none left over after bills.

Do you already own the house? At 22 yo, if you don't have the house already, don't buy it, if you do have the house, you need to analyze situation further.

Here is my GUESS at why you posed the question

You have income of $1000-$2000 per month (net take home). You have a house payment which is about 40% of that take home and a car payment which is another 10-25% of that take home... to point where car+house is more than 50% of what you net. You have other bills to pay and when you add it up, you see

about $2000 net take home
about $2200 of bills to pay each month

so you move money around, say "I can pay car off with Roth" and say "I have $2000 take home and $1800 of bills to pay".

The issue is you have too much house or too much car (or too much of both). Whether you have a 401k or Pension should not factor into decision to cash out Roth- because no where in your post did you state how much was in 401k, so don't bet on future benefits to justify present decisions.

You want the budget to balance, the best way would be to analyze all finances- like tax return, bills you pay each month and similar, and find a way to free up some cash so budget balances.

If you make $X you should plan that you spend only 80% of $X and save 20% of X. That needs to be your plan from day 1, so you don't overspend on a house or car and get into a financial pinch or crisis.

[investingnoob]

I did buy too much house. I was getting big overtime and now im not. My brother is a loan officer and pushed me to buy cuz of the market. Now I wish I wouldn't have. Ill free up $350/mo. Once i pay my car off.

[bjl584]

I would look at cutting in other areas before considering cashing out a ROTH. Selling the house should be a priority. In the meantime, cut back in more immediate areas such as cable, internet, etc.

[jIM_Ohio]

Originally Posted by investingnoob

I did buy too much house. I was getting big overtime and now im not. My brother is a loan officer and pushed me to buy cuz of the market. Now I wish I wouldn't have. Ill free up $350/mo. Once i pay my car off.

So if your take home was $2000 and bills were $2200, and paying off car has take home at $2000 and bills at $1950, that difference can easily be made up without reducing your net worth.

Please realize you would reduce net worth if you took an asset which appreciates (Roth) and sold it for an asset which depreciates (car).

In 5-10 years that car won't exist anymore, so if you keep making decisions like this, or even considering decisions like this, you will not ever get ahead financially.


Start at the basics

1) What is gross pay and take home pay?
2) What are monthly and yearly expenses?
itemize this list
pay close attention to things like car insurance, house insurance, cable, phones and utilities.

I think I can find $350 savings in utilities and insurance alone. Raise deductibles, turn off lights, cancel home phone, reduce cable package (for example don't pay for HD service). Do you get a large tax return?

Then use that $350 you free up to make sure you always spend less than you earn. In about 13-16 months the car should be paid off, once that happens, take the $350 you pay now and plan ahead.

Allocate $150/mo to get replacement car (pay cash for the car which replaces this).
Allocate $50/mo extra to mortgage (pay down that balance)
Allocate $150/mo to invest

You need to make sure you always (ALWAYS!) spend less than you earn AND (always!) set aside some monies so various bills disappear off budget (like the car payment and mortgage) so you have more liquid cash to do things with.

[investingnoob]

Awesome advice jim thank you. When I get off work I'm going to list everything I spend,earn,invest, etc.

[disneysteve]

Originally Posted by investingnoob

I have $4800 left on car @ 5.24%.

Ill free up $350/mo. Once i pay my car off.

How much is the car worth today? Check KBB.com to get a private seller price.

I agree with Jim that you need to look at the big picture - income, expenses, debt, etc.

$350/month with a $4800 balance works out to 14 more payments so this loan goes away in just over a year no matter what you do. It is not worth sacrificing your retirement savings. Better to slash your expenses to free up cash until this car is paid off. Also, look to pick up extra income. Since you are no longer working all the overtime, there should be time free to get a second job.

Do you need to sell the house? Is that even a realistic possibility based on market conditions in your local area? I would certainly be looking into that option.

[jpg7n16]

Originally Posted by investingnoob

I did buy too much house. I was getting big overtime and now im not. My brother is a loan officer and pushed me to buy cuz of the market. Now I wish I wouldn't have. Ill free up $350/mo. Once i pay my car off.

How much will you free up by selling your house and renting a cheaper place?


That's likely your largest problem.

Oh and do NOT cash out the Roth to pay off the car.

[Joan.of.the.Arch]

Two months ago you were considering whether you should pay off your car and increase your retirement investing and emergency fund using your $8000 first time home buyer incentive. Evidently you did not pay off the car or increase the EF, so did you just put it into an IRA and now you are thinking of taking it back out?

You bought this house just a couple of months after looking into buying and jumped from looking at a condo to a house with more bedrooms than you have people.

You were going to hold off on the purchase of washer & dryer for your new home and just use your parents' facilities for a while. Once you had the house, you evidently bought them anyway and then two months ago you were also thinking of using a portion of your first time buyers refund to pay those off.

I'm kinda drawing breath through my teeth to say that you might be a little more impulsive than is good for you. Optimism is great (I could use more myself), but if you have a strong tendency toward over optimism please, please learn to slow down your decisions and to steel yourself against people who simply say, "Ah, go ahead! Do it!" without using the facts. Like your brother who advised you on the purchase and loan (I assume he is a professional?)--Did he really help you make the decision to buy the house based on the fact that (in a big recession!) you had overtime pay coming in? That was probably very short sighted. Overtime could have been used to increase the down payment, but should not have been used to determine how much monthly payment you could afford.

Sorry, I know this is pretty naggy and bringing up your previous posts. Please, just don't continue to act first think later. You'll crash and burn.

[snshijuptr]

Have you thought about getting renting roomates? That will free up a lot of cash flow. You are young and if there is more than one bedroom in your house, you should rent it out.

[jIM_Ohio]

Originally Posted by jpg7n16

How much will you free up by selling your house and renting a cheaper place?


That's likely your largest problem.

Oh and do NOT cash out the Roth to pay off the car.

I agree house is a problem based on the few numbers already given... but the likelihood OP can sell house before next payment is due and get car paid off (or the next payment) is minimal... which means OP might cash out Roth, pay off car, then sell house and various other issues associated with this.

OP needs to make sure he understands 2 issues, and keep them separate (to avoid impulse decisions):

1) There is the short term picture to make sure any payment OP has can be made- this is **probably** easily done (I think) by cutting current expenses.
2) Look at big picture (like the house) and be able to make decisions as to whether it makes sense to keep it or get rid of it, make similar decision on the car (keep it or get rid of it), make similar decisions on other financial issues (pay down debt or invest) going forward. This is where having a financial plan will help.

Joan.of.the.Arch Two months ago you were considering whether you should pay off your car and increase your retirement investing and emergency fund using your $8000 first time home buyer incentive. Evidently you did not pay off the car or increase the EF, so did you just put it into an IRA and now you are thinking of taking it back out?

You bought this house just a couple of months after looking into buying and jumped from looking at a condo to a house with more bedrooms than you have people.

You were going to hold off on the purchase of washer & dryer for your new home and just use your parents' facilities for a while. Once you had the house, you evidently bought them anyway and then two months ago you were also thinking of using a portion of your first time buyers refund to pay those off.

I'm kinda drawing breath through my teeth to say that you might be a little more impulsive than is good for you. Optimism is great (I could use more myself), but if you have a strong tendency toward over optimism please, please learn to slow down your decisions and to steel yourself against people who simply say, "Ah, go ahead! Do it!" without using the facts. Like your brother who advised you on the purchase and loan (I assume he is a professional?)--Did he really help you make the decision to buy the house based on the fact that (in a big recession!) you had overtime pay coming in? That was probably very short sighted. Overtime could have been used to increase the down payment, but should not have been used to determine how much monthly payment you could afford.

Sorry, I know this is pretty naggy and bringing up your previous posts. Please, just don't continue to act first think later. You'll crash and burn.

Joan- thank you for posting this.


As part of the homework OP should do, OP should list

1) income (gross and net)
2) expenses (itemize- including insurance, utilities and spending)
3) 2009 and 2010 tax return info (AGI and taxable income)- you don't need to post these, just look for a trend (were both returns about the same, if they were not, please explain the delta- like a new job, moved out of parents house, more overtime, less overtime etc- I am looking for a trend)
4) Project 2011 taxes based on current pay stubs
a) wherever you filed your 2009 and 2010 taxes (like turbotax.com) go to same site and plug in current numbers for 2011 return.
b) as part of 2011 projections, you need to do the following
b1) income on July 31 is 7/12 of what you make for year, take 5/12 of that income and add it in (so if you get paid every other week and have received 15 of 26 paychecks, add in 11 more paychecks)
b2) find the closing documents on the loan. Somewhere should be an ammortization table (shows loan payoff and interest paid each month). Add up all interest paid in 2010 (so June-December for example)
b3) when filing tax return, choose itemized deductions and plug in the interest paid. If you know property taxes, have that number added in too. If you pay other taxes add that in too (schedule A taxes paid section).
b4) when filing tax return, choose standard deductions and if there is a line for interest paid on front of tax return, plug in numbers there

**there are two ways to account for interest paid on a mortgage- see what gives you best results for 2010 right now**

Then compare refunds of 2009, 2010 and 2011 tax returns
are all returns "about the same", or is there a trend (like 2011 return has a much higher refund). This refund might help you solve your problems faster- maybe you just pay off the car with it (for example) and free up the needed cash flow sooner.

Based on my experience, it usually takes 2-3 years to get tax return trend and withholdings correct for a house. What I am trying to do is help you see that trend sooner, and if you can adjust withholdings now, you can get more cash now to help solve the $350 deficit. Its a short term fix, but is easy to do as long as you keep your job.

If you qualify for the new house credit, then you might have a much higher refund than the car balance, you just need to factor this money into budget now so you have $350/mo extra.

[jpg7n16]

Originally Posted by jIM_Ohio

I agree house is a problem based on the few numbers already given... but the likelihood OP can sell house before next payment is due and get car paid off (or the next payment) is minimal... which means OP might cash out Roth, pay off car, then sell house and various other issues associated with this.

Who said it needed to be done by the time the next payment is due?

If the house is too large, it's too large regardless of whether he still has a car payment or not.


My statement was aimed more at the OP mindset of "well I bought this house, and it was a mistake, so now I'm going to have to suffer through it - even though I can't afford it anymore." You have options- like sell it.

I like the roommate idea too.

[jIM_Ohio]

Originally Posted by jpg7n16

Who said it needed to be done by the time the next payment is due?

If the house is too large, it's too large regardless of whether he still has a car payment or not.


My statement was aimed more at the OP mindset of "well I bought this house, and it was a mistake, so now I'm going to have to suffer through it - even though I can't afford it anymore." You have options- like sell it.

I like the roommate idea too.

I think you misunderstood my point
its not what I posted
its what I am thinking LOL

Your comments were correct (house is probably too much based on what little we know)

however it might take 4-12 months to liquidate house, in that 4-12 months the hole might get dug deeper to where new problems surface (if house could be liquidated in 1 week, this post is meaningless), but more than likely their is a lead time to where the solution you (and many others, including me) proposed, and in that time more problems could arise (if expenses are higher than income).

So my comment to OP is to separate the issues

1) make sure current budget balances- this needs to take effect immediately by cutting expenses
2) make sure the long term outlook has good decisions- like selling house, paying off car, keeping Roth

Because if the only solution is selling the house, there will be more problems if budget is in the red right now, and it takes 4-12 months to sell. Each Month house does not sell causes a bigger deficit.

[investingnoob]

Awesome advice jim thank you. When I get off work I'm going to list everything I spend,earn,invest, etc.

[investingnoob]

Warning big post! here ya go JIM!

Ok so in 2009 my gross was around 55,000. AGI was $42,707. My taxable was $33,357.
In 2008 it was really about the same..

My job requires me to drive my own car store to store. I get paid tax free mileage .50/mile.
I was driving a lot of miles because my route was so far away. Unfortunately I got changed to a route right next to my house which seems good but made me lose tons on mileage. I know it means less gas, but I was actually making money off them.

Also I haven't gotten any overtime, maybe 1-3 hrs a week. I was getting 10+ a week.
So with both those hits, my paychecks are probably $200 less a week at least.

Now the number crunch.

It's difficult to say because my job pay is so fluctuating, but lets assume a 40hr week.
take home is $650/week. after putting 4% into 401k, medical, dental, vision, union dues.

Pay: $650
I charge rent to my buddy $350/month + split utilities in half
My girlfriend pays me: $400/month.
My income a month= $3350 (w/o splitting utilities)

Bills=
Mortgage= $1,430.54/month
Power/gas= $65~/month
Home owners= $76/month
Garbage=$38.60/every other month
water=$62~/every other month
Comcast bill=$133.60/month (paid on my discover card)
Cell phone bill=$97/month (also paid on my discover card)
Gym membership=$21/month
Car insurance=$250.66/month
Car payment=$373.83/month with $$4,685.26 left as of right now.

Now my friend splits utilities(comcast,power/gas,water,garbage) in half, so my utilities are $375.20 on a month I pay garbage/water.
Since my comcast and cell are paid on my card I'll subtract that here.
Bills=$2220.43

I use discover card to pay for everything else.
Just got it to make some cashback, opened my account in the end of june.
My spend analyzer shows in the month of JULY...
I spent $1496.00 for that 1 month...

Merchandise=$695 (I had to buy clothes/shoes for my friends wedding as his bestman. The rest is from walmart for grocieries.)
Services=$250 (I pay my comcast bill through here and my phone bill)
Restaraunts=$193 (eating out)
Gas=$134
Travel/entertainment=$62 (includes my gym membership, buddies bachelor party)
Dept. store=$49 (clothes for wedding)
Supermarkets=$43 (minor grocieries)
home improvement=$32 (BBQ parts)
Medical services=$30 (allergy checkup)
Gov. services=$8 (stamps)

Total=$1496
------
Income= $3350/month
expenses=$3716.43 for month of July.

HOLY CRAP! I never actually totaled everything up like this...

Now that all thats done, I really can't sell my house, I got my $8k refund, and I'd have to pay that back if I sell it in 3 yrs. I've only been in it for 6 months.

And I freak out every month when bills are paid. I'm living paycheck to paycheck with anxiety like the many Americans out there...
I've lived with my parents making this kind of money for 3yrs, so as you know grossing 55k/yr with no bills, I just had no care for money, I spent when I wanted without thinking about it.
never lived on my own, so this was a huge step buying a house (not smart I know)
I can sit here and blame my brother n law for pushing me to buy a house since it was the time to buy but when really I wasn't prepared...

I really don't know what to do right now, I'm just trying to pay the bills and get through this. As you can tell I can't afford to put into my roth ira anymore...let alone savings...

401k as of right now=$10,500
Roth Ira=$6k
I have $10k in savings, ($8k from home buyer refund.)
$2800 in checking, which is about to be crushed from my discover card bill $1100 due on the 10th.
My car insurance will be due on the 18th. My car payment the 18th.
Then before you know it, my home mortgage will be due again...AHH I'm so stressed...

[investingnoob]

BumpIng

[jIM_Ohio]

Originally Posted by investingnoob

Warning big post! here ya go JIM!

Ok so in 2009 my gross was around 55,000. AGI was $42,707. My taxable was $33,357.
In 2008 it was really about the same..

My job requires me to drive my own car store to store. I get paid tax free mileage .50/mile.
I was driving a lot of miles because my route was so far away. Unfortunately I got changed to a route right next to my house which seems good but made me lose tons on mileage. I know it means less gas, but I was actually making money off them.

Also I haven't gotten any overtime, maybe 1-3 hrs a week. I was getting 10+ a week.
So with both those hits, my paychecks are probably $200 less a week at least.

Now the number crunch.

It's difficult to say because my job pay is so fluctuating, but lets assume a 40hr week.
take home is $650/week. after putting 4% into 401k, medical, dental, vision, union dues.

Pay: $650
I charge rent to my buddy $350/month + split utilities in half
My girlfriend pays me: $400/month.
My income a month= $3350 (w/o splitting utilities)

Bills=
Mortgage= $1,430.54/month
Power/gas= $65~/month
Home owners= $76/month
Garbage=$38.60/every other month
water=$62~/every other month
Comcast bill=$133.60/month (paid on my discover card)
Cell phone bill=$97/month (also paid on my discover card)
Gym membership=$21/month
Car insurance=$250.66/month
Car payment=$373.83/month with $$4,685.26 left as of right now.

Now my friend splits utilities(comcast,power/gas,water,garbage) in half, so my utilities are $375.20 on a month I pay garbage/water.
Since my comcast and cell are paid on my card I'll subtract that here.
Bills=$2220.43

I use discover card to pay for everything else.
Just got it to make some cashback, opened my account in the end of june.
My spend analyzer shows in the month of JULY...
I spent $1496.00 for that 1 month...

Merchandise=$695 (I had to buy clothes/shoes for my friends wedding as his bestman. The rest is from walmart for grocieries.)
Services=$250 (I pay my comcast bill through here and my phone bill)
Restaraunts=$193 (eating out)
Gas=$134
Travel/entertainment=$62 (includes my gym membership, buddies bachelor party)
Dept. store=$49 (clothes for wedding)
Supermarkets=$43 (minor grocieries)
home improvement=$32 (BBQ parts)
Medical services=$30 (allergy checkup)
Gov. services=$8 (stamps)

Total=$1496
------
Income= $3350/month
expenses=$3716.43 for month of July.

HOLY CRAP! I never actually totaled everything up like this...

Now that all thats done, I really can't sell my house, I got my $8k refund, and I'd have to pay that back if I sell it in 3 yrs. I've only been in it for 6 months.

And I freak out every month when bills are paid. I'm living paycheck to paycheck with anxiety like the many Americans out there...
I've lived with my parents making this kind of money for 3yrs, so as you know grossing 55k/yr with no bills, I just had no care for money, I spent when I wanted without thinking about it.
never lived on my own, so this was a huge step buying a house (not smart I know)
I can sit here and blame my brother n law for pushing me to buy a house since it was the time to buy but when really I wasn't prepared...

I really don't know what to do right now, I'm just trying to pay the bills and get through this. As you can tell I can't afford to put into my roth ira anymore...let alone savings...

401k as of right now=$10,500
Roth Ira=$6k
I have $10k in savings, ($8k from home buyer refund.)
$2800 in checking, which is about to be crushed from my discover card bill $1100 due on the 10th.
My car insurance will be due on the 18th. My car payment the 18th.
Then before you know it, my home mortgage will be due again...AHH I'm so stressed...

I was away for a long weekend, sorry for delay

Outside of the $700 you spent on wedding, would you be spending less than you earn each month? If you look at June or May bill, would it be $800/mo on discover, or closer to $1400?

On the tax returns- did you itemize or claim the standard deduction?
Have you received the $8000 tax credit yet for the home purchase?

[investingnoob]

Yes my cc bill will be less w/o wedding.
I have my $8k from refund in my savings. Which I could use to pay car off, but would mean id have little savings.

I just spent $160 at Costco on grocieries which should last a good while, ill stop going to stores to buy groceries every night I think that was a big spender.

[jIM_Ohio]

Originally Posted by investingnoob

Yes my cc bill will be less w/o wedding.
I have my $8k from refund in my savings. Which I could use to pay car off, but would mean id have little savings.

I just spent $160 at Costco on grocieries which should last a good while, ill stop going to stores to buy groceries every night I think that was a big spender.

Quick math suggests if you pay off car, you would have 1 months expenses in savings (correct?).

That is an option to consider

Can you remind me of these line items

1) Monthly income
a) with just your job
b) with rental income
c) (do you claim the rental income on tax return)?

2) Expenses
a) I have $2220+$800, but some of that overlaps
its best to lump all expenses in one list, then break it down later, than to have two lists with some expenses which overlap.
b) focus on 4 types or breakdowns of expenses
b1) total expenses (all expenses from all categories)
b2) required expenses- these expenses exist even if you lose your job
b3) tax deductible expenses- if you claim the rent, you MIGHT be able claim other expenses as deductions For example if you claim the rent, a portion of heating bill is deductible as a business expense.
b4) business related expenses (these might also be deductible)

b3 and b4 are best to think about now, and as you learn more about taxes, you might find some better cash flow because of higher tax return.

3) Debts list amount, interest rate and projected payoff date
3a) house
3b) car

4) Tax return
a) did you itemize in 2010 (on 2009 return)?
b) have you projected mortgage interest onto 2010 taxes? It should increase refund. If you used turbo tax online, go there and use projected 2010 income with 2010 taxes withheld with 2010 property taxes and mortgage interest paid and see what your refund might be.
c) with 2008 and 2009 tax returns being similar, you have a trend so you know if you take standard deduction, you expect the 2010 return to be about the same (try this), then change to itemized deductions and quantify the difference.


Here is what I am thinking:

1) Pay off the car with some of savings (leave 1 mo expenses in savings), this adds $350.mo to cash flow.
Decide how long your car will last (for example 6 more years) then decide the value of the car you will buy in 6 years (for example 20k) then divide 20k/72 (72 is 6 years and 12 months per year) and this is $277. So put $277/mo into savings (in 16 months savings will have same amount in it that it does now).
The use $80/mo to save for future (I suggest adding it to 401k or possibly Roth).

2) You need budget to balance before rent is paid (from girlfriend or from roomate) if at all possible. At minimum try banking about 10% of rent payments to you.

3) You will probably gain some cash flow once you see the higher tax return- I would put a short term focus on this- if old tax return was $1000 and new tax return is $6000, then you want to get $400/mo more take home ($5000 difference/12 months) and then apply that $400/mo to either 401k or Roth.

4) Set goals
a) Set a goal to get 401k+Roth deposits to 15% of gross income
b) set a goal to add 5% of gross to savings (the $277/mo I outlined from paying off car counts towards this goal)
c) set a goal to never finance a car purchase again
d) set other goals as you see fit

5) See money differently.
How you viewed the $.50/ mile is a good example.

You said you were reimbursed less for less driving (makes sense) and it HURT cash flow. I say it helped, because now the car replacement timeframe might have gone from 4 years to 6 years. For example had you had more miles, that car math where I came up with $277/mo to replace car might actually be $416/mo (20k car divided by 48 months to save for replacement). The lesser milage is SAVING you money, not giving you more money.

Any milage reimbursement should be seen as gas+car depreciation. If it costs $40 to fill up tank, move $40 into checking, and bank the rest to help pay for the next car (trust me on this, the depreciation aspect of $.50/mil is more than the gas costs- run the numbers to decide how much a car is worth after you drive it for work).