Traditional or Roth IRA? (1 Viewer)

[CapnSharpe]

Always on the lookout for good financial advice, I found the following article on money.cnn.com http://money.cnn.com/2002/08/08/pf/c...oans/index.htm. I thought I found a good way to reduce my student loans early and to do with tax-free earnings - by opening a Roth IRA. The T. Rowe Price brochure says that the contribution and earnings from a Roth IRA WOULD be taxable if used for an educational purpose, but I wouldn't have to pay an additional 10% penalty.
Is that correct? Or am I missing some fine print elsewhere in this brochure? I can't believe CNN would give such bad advice.

 

[Todd Hochard]

Withdrawing your original contributions to a Roth IRA is never taxable. After-tax money went in, and the same money can come back out at any time. The EARNINGS on that money are subject to all the normal IRA stuff if you withdraw early.

Let's say you invest $1,000 per year into a Roth. You withdraw that $5,000 principal after 5 years to pay off your student loans. Assuming an 8 percent growth rate, the earnings left behind would total $1,335, an amount that would ultimately grow to $29,000 tax-free by the time you retire.

See, they are just taking out the $5000 they put in over the 5 years, to pay student loans. The idea is that you would then have the earnings still left in the Roth IRA, which would continue to grow.

Of course, this whole scenario could go bad. I've been contributed to a Roth IRA since we were allowed, and mine is worth less than the money I put into it. Oops- that's not an effective debt lowering tool.:b

It seems like a whole lot of work for not much. As I see it, your REAL return is -

Growth Rate x (1+retirement tax rate) - student loan rates

Or around 2-3%, if my math is right (I'm no professional, so it might not be)

I'd just tend to pay it off. For most, the psychological advantage of getting rid of that huge weight probably outweighs the relatively small financial gain.

However, I would recommend that you put at least 10% into your 401(k), regardless of your debt situation (unless you are on the brink of bankruptcy, of course).

Todd