Cashing in a Roth IRA

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!


3 responses to “Cashing in a Roth IRA

  • Petunia 100

    Your friend is a TRUE friend, she did you a huge favor! 🙂

    • Jenn

      Yes. She has the same debt issues I do. I was mostly concerned with not having enough savings to cover any major issues, like last year when I had to take a loan from my 401k to pay for a new roof. I want enough money in savings to cover the big emergencies.

  • Jeff Ryan

    I am glad you had a good friend like that. And that friend could talk some sense into you. I know it sounds tempting but it really is your emergency fund.

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