Today’s question comes from Terry from Jacksonville, Florida…
“Got an interesting Roth IRA question for you. I was considering cashing out an old Roth IRA account to clear some small debt from a credit card.
And when I was doing so I was trying to figure out how much my original contributions to the Roth 401k account were vs. what my gains were and what I’d be responsible for paying taxes on because those funds don’t qualify for any of the early withdrawals.
The account was from a previous employer in 2008 and 2009, I do not still have those accounts. And the account itself has changed hands between a number of financial institutions. From Scottrade to TD Ameritrade and now Schwab. And they all have no records to tell me that either.
My question is what’s my course of action here if I decide to go this route, and if not, is this something I need to be tracking with my current Roth IRA account to keep track of this for the future if I ever need to tap into those funds during a critical time of financial need.”
Matt & Joel’s response: Sounds like you’ve been jostled around to different brokerage firms, Terry. That can make record-keeping difficult.
Truth be told, we don’t want you to cash out ANY Roth account dollars to pay off what you referred to as ‘small credit card debt.’ That would be bad news bears!
Here are a few thoughts on your situation, as well as other options (including using a 0% APR balance transfer) to help get you out of your credit card debt…
Digging up old Roth records
First, we would suggest reaching out to the HR dept of your old employer to see if they have records of your Roth 401k accounts and contribution amounts. That’s one stone worth turning over.
Specifically, you’re looking for the original contribution amounts in those years.
Or, if you have old account statements, you might be able to reach out to the old investment firm itself (or the new parent company they merged with) and they might have those records too.
Another idea is to look through your old tax filings. If you rolled over a Roth 401k → Roth IRA, you should have received a 1099-R form which you would have filed as part of your old tax returns. Can you dig those up?
Lastly, if you know the exact years you contributed, and you recall maxing out those Roth accounts, you can dig up the contribution limits for 2008 and 2009.
That might be a little hard given a Roth 401k (because they have a blended contribution limit with regular 401k contributions). But for direct Roth IRA contributions, the limit back in 08/09 was $5k per year.
Early Withdrawal Penalties for Roth 401k
Roth IRA contributions can be taken out tax and penalty free.
But the Roth 401k doesn’t receive the same treatment. Which means taking money out of a 401k account, even if it were below your contribution threshold, would result in taxes and penalties, making it a massive financial mistake.
Otherwise you need to wait until age 59½ for those withdrawals to be tax and penalty free.
If you have an old Roth 401k, you’ll want to roll that over to a Roth IRA asap. This helps you withdraw contributions via Roth IRA rules, not 401k.
And if you need help, talk with our friends at Capitalize who can help you with the process at no cost!
Regardless of penalties, is it a good idea to be tapping into Roth funds to pay off your debt?
Should you use Roth funds to pay off CC debt?
Our quick take is NO!
That’s because you’d be robbing future you of a much bigger tax-free nest egg if you were to pull those dollars out now.
I’m not sure how small this credit card debt is. But we’d much rather see you live on a bare-bones budget for 9-12 months so you can eradicate it in short order. The best route for your ultimate wealth-building efforts is to leave all those dollars intact in your Roth 401k!
This move has a double impact. It keeps those dollars working for you, dramatically impacting your future net worth. And it also helps you feel the pain of the cc debt you’ve accrued.
We’re not masochists, but tapping a retirement account feels like the easy way out, which is why people take it.
But, all too often, folks find themselves back in debt again not too far down the road (and with a much lighter retirement account to boot!)
So make a plan to cut spending & funnel more towards that debt so you can pay it off quickly instead!
Use a 0% APR Balance Transfer
If the interest you’re paying is frustrating right now – and I bet it is – you might want to consider transferring the balance to a 0% APR balance transfer credit card.
That might be the happy medium choice here. Choose a card with a long enough 0% rate where you feel confident that you’ll be able to pay it off in full within that timeframe.
You will pay a transfer fee, typically 3 or 4% of the debt balance, but that’s worth not having any interest accrue for 15, 18, or 21 months!
We’re getting a little outside of the bounds of your original question, but alarm bells go off in our heads when we hear young folks thinking about tapping their retirement accounts early. There are almost always better ways to proceed!
Tracking of Roth contributions going forward
As you’ve experienced firsthand, it can be frustrating trying to find decade-old records of Roth contributions.
We recommend setting up a simple tracking spreadsheet for each year going forward. One column for you, and one for your wife. At the end of each financial year, just make a simple note of exactly how much you contributed to each Roth IRA or Roth 401k.
You should also receive a Form 5498 each year stating Roth contributions. It can’t hurt to print out those annual contribution statements for your records.
The good news is you’re with Schwab now. They’re one of the biggest low-cost players and their record-keeping abilities are excellent.
The Bottom Line:
Sadly, the effort of digging up your old retirement account records might be a waste of time. It’s frustrating, but it is what it is. Going forward we hope you can put a simple system in place to track those contribution amounts!
Regardless, we really don’t recommend pulling money out of Roth accounts before retirement age. There are other ways to clear that credit card debt. Switching to a bare bones budget will help, and so will using a 0% APR card if you qualify.
Good luck Terry!
For the full version of this discussion, check out Podcast Episode #847 (it’s the 3rd question in the episode)
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