Should you hit up that Roth IRA to help pay off your student loans?
August 9, 2012

By Carlin Sack for

One of the most common pieces of financial advice young people receive is to use a Roth IRA as a way to prepare for retirement. You are probably thinking, “Hah, plan for retirement?” We get it. Who can think about saving that far out in advance when there are piles (and by that we mean mountains) of student loans to pay off?

But opening a Roth IRAs is such a smart decision that you can’t afford not to make it. It’s the only way to save where you pay taxes up front, so what you earn – which is hopefully substantial –  from investing the money in the account isn’t taxed  when you retire and are ready  to start making withdrawals. So letting your investment money sit in a Roth will pay huge dividends by the time you retire.

So let’s say you’ve opened a Roth, and have put some money in, but you’re having trouble making your student loan payments. For those of us making our way through those mounds of student debt, withdrawing from our Roths now to pay off or pay down the debt sure does seem appetizing. We can’t make the decision for you, but here are a few thoughts to consider when making the decision…

What’s the deal with withdrawal penalties? Although it is possible to withdraw from your Roth IRA any time for any reason, you can get penalized. If you are not 59.5 years old or if the account has not been open for five tax years since your first contribution to the account, you will have to pay income taxes on the amount plus an additional 10 percent tax. There are a few exceptions here, like if you are buying your first home (you can withdraw up to $10,000 without penalty in this case). So Iin the process of withdrawing early, you will be losing a lot of your hard-earned money, so withdrawing from your Roth may not be in your best interest.

Slow-and-steady planning ensures comfortable retirement. Of course, you are making your account smaller if you withdraw from your Roth (and therefore not earning as much interest), but you knew that already. Just make sure to take a look down the road at the big picture. That road to retirement becomes a wee bit shakier once you withdraw from your Roth IRA. Even if retirement is a long way off, trust us – Future You will want to thank Present Day You. How is your 401k looking? Do you or anyone in your family have any extra accounts set up for retirement? Retirement is usually one thing we like to be financially sure about.

It’s a numbers game. Take a look at all your interest rates for your loans ( can help you with that, by the way) and compare that with the interest rates on your Roth IRA. Are your loan rates higher than your Roth’s and eating away every last penny you have? Then it might be best to pay off the loans as quickly as you can! If you’re going to make that choice though, make yourself a promise that, once you’re comfortable – whether that’s before or after you’ve fully paid off your student loans – you’ll show a little restraint from “making it rain” and focus on building back up that Roth IRA. But if the Roth has extremely high interest rates, take advantage of that and keep the money there!

We know, that’s a lot to think about. Financial decisions consume every corner of your life from paying for school to retiring in your dream house. But these things are important to think about. The last thing any of us wants is our student loan payments following us to our front porch rocking chairs in 60 years.

Carlin Sack writes for and attends Northwestern University’s Medill School of Journalism