I was close to cashing in a Roth IRA on Monday, fortunately a friend talked me down. After going backwards in debt reduction this last month, that panicky feeling of failure started to set in and I focused in on the $5780 Roth that has just sat there doing nothing for the last six years.
I did some investigation and discovered that I could cash out the majority of the IRA without taxes and penalties. In 2003 I converted $3450 from my former employer into a Roth and paid the taxes. I made four more contributions of $50 each, totaling $200. I have a 401(k) and a Roth 401(k) through my current employer that is in a bigger investment pool and makes more sense to contribute to those two accounts rather than this small Roth.
Apparently as long as the conversion was more than five years ago, I don’t have to pay the 10% penalty, at least that was my interpretation when I read the rules. I would only have to pay the penalties and tax on the remaining $2130. I desperately want to make a large dent in my debt and only have one credit card payment. I have been putting $400 a month into a savings account to build up a small savings as I don’t feel comfortable with only a $1000 as my emergency fund. Every time I have needed to use the emergency fund the entire amount seems to get wiped away at once, $1000 just isn’t enough.
My friend pointed out that my Roth is my true emergency fund. I can get the money out if I desperately need it, so I should stop putting so much into the other savings and use it toward debt. She is right, I feel much better knowing I can access the money, even if I never do. So, with this in mind I readjusted my savings contributions and have an additional $200 a month I will now be putting on my debts. I should be down to only one credit card and my student loan by next year!
Panic mode is over!