Roth IRA Withdrawl Question

[throwittoblythe]

Seeking help from financial fanatics…

I was given a loan from my company which allowed me to purchase shares in the company. The shares are worth more than the loan at this point but the company controls when I can actually sell them. If I leave the company and they don’t allow me to sell, I may need to pay off the loan myself.

Here are the options I’m considering:

1) Pull from my Roth IRA contributions. I'm well below the 59-1/2 age limit but as I read it, I can pull contributions at any time tax-free and penalty-free.
2) Private/Personal loan from bank. Interest rates for this are in the 9-10% range.
3) HELOC - We have plenty of equity and great credit. Rates here are better than private loan, but still in the 7-8% range.

My questions:
A) Am I correct that I can withdraw Roth contributions without issue? (Setting investment growth issues aside).
B) What else should I consider? Which options are best?

 

[JM4CY]

Withdraw it all and put it in Crypto.

 

[Clark]

Yes, you can withdraw previous contributions to your Roth penalty free. Only the earnings are subject to penalties before 59.5

 

[KnappShack]

Not a financial advisor.

But it would need to be a real good goddam reason to pull funds from an account that will grow tax free for decades.

 

[CoachHines3]

if you want to pull from your retirement account, then go for it. Like others said, you can pull out your contributions penalty/tax free.

 

[iastatefan1]

Seeking help from financial fanatics…

I was given a loan from my company which allowed me to purchase shares in the company. I have an agreement with my employer that I don't actually make any payments while I'm employed. The shares are worth more than the loan at this point but the company controls when I can actually sell them. They are shares I own outright (but with the loan) and not stock options. If I leave the company and they don’t allow me to sell, I may need to pay off the loan myself. The loan itself is about $35k +/-.

I could keep paying the loan to the company in the terms as-is, but the payments are higher than I'd want to take on in the short term.

Here are the options I’m considering:

1) Pull from my Roth IRA contributions. I'm well below the 59-1/2 age limit but as I read it, I can pull contributions at any time tax-free and penalty-free.
2) Private/Personal loan from bank. Interest rates for this are in the 9-10% range.
3) HELOC - We have plenty of equity and great credit. Rates here are better than private loan, but still in the 7-8% range.

My questions:
A) Am I correct that I can withdraw Roth contributions without issue? (Setting investment growth issues aside).
B) What else should I consider? Which options are best?

Roth contributions can be drawn without issue (penalty or taxes) as long as you have documentation of the basis (contributions). If you get into the earnings (don't have enough basis) that's where penalties etc come in.

 

[CHim]

Are you planning to leave the company in the foreseeable future? If no, why pay it back? Could you invest the payment in something low risk so if you decide to change companies you have the hedge in place? Typically these are set up to be forgivable over a set term, does this one have that? If not, can you negotiate it in at your next compensation discussion? I have seen them set the loan as forgivable over 5 years, similar to the initial vesting period for 401K.

 

[KnappShack]

Roth contributions can be drawn without issue (penalty or taxes) as long as you have documentation of the basis (contributions). If you get into the earnings (don't have enough basis) that's where penalties etc come in.

From the ChatBot.

"Once out, stays out: The withdrawn contributions cannot be deposited back into your Roth IRA. They've already received the tax benefit, so you can't re-contribute them."

You would lose that tax free earning potential forever. So that company stock better be fantastic. It's a non-diversified play that takes $$ from a tax free account.

I say this as someone who worked at a bank that went under. The large amount of stock I had went to worthless pretty quickly

 

[DSMCy]

I don't think this will work for your situation, but I'll add one more option to your list of potential loans: Security Backed Line of Credit

Probably a few things that make this not viable (account minimums, interest rate, account that manages the shares, etc) but something you could look into.

Here's info from Charles Schwab's program:

Charles Schwab

 

[Cyched]

I say this as someone who worked at a bank that went under. The large amount of stock I had went to worthless pretty quickly

Enron?

 

[Clark]

From the ChatBot.

"Once out, stays out: The withdrawn contributions cannot be deposited back into your Roth IRA. They've already received the tax benefit, so you can't re-contribute them."

You would lose that tax free earning potential forever. So that company stock better be fantastic. It's a non-diversified play that takes $$ from a tax free account.

I say this as someone who worked at a bank that went under. The large amount of stock I had went to worthless pretty quickly

eh, chatbot isn't exactly correct you can recontribute, you're just limited to the maximum annual contribution amount.

I'm not sure a 9% loan is a good idea either. The question really is which asset do you think will be more valuable to you when you want to retire. None of us can know that answer for you, we don't even know which companies stock you bought.

 

[KnappShack]

Enron?

No, but in the team picture

 

[KnappShack]

eh, chatbot isn't exactly correct you can recontribute, you're just limited to the maximum annual contribution amount.

I'm not sure a 9% loan is a good idea either. The question really is which asset do you think will be more valuable to you when you want to retire. None of us can know that answer for you, we don't even know which companies stock you bought.

I understand it as you can contribute as usual, but the funds you pull can't go back in.

Is this not correct? If I pull $14k in contributions those are gone forever from the Roth.

I can contribute going forward, but the funds I pull will never be returned.

Is the bot wrong?

 

[1100011CS]

Is this a typical scenario? Seems kinda janky to me.

 

[Cyched]

Seems like a situation better fleshed out with an advisor rather than on a sports message board.

 

[1100011CS]

I understand it as you can contribute as usual, but the funds you pull can't go back in.

Is this not correct? If I pull $14k in contributions those are gone forever from the Roth.

I can contribute going forward, but the funds I pull will never be returned.

Is the bot wrong?

I think the point is you will never be able to 'catch up' to where you were before if you were already putting in the max/yr. But if you weren't maxing out before, you could catch up by maxing out after. Correct?

 

[Clark]

I understand it as you can contribute as usual, but the funds you pull can't go back in.

Is this not correct? If I pull $14k in contributions those are gone forever from the Roth.

I can contribute going forward, but the funds I pull will never be returned.

Is the bot wrong?

I think you're right, your wording is poor. You are correct that you can't just put that entire 14k back in immediately.

Anyway, my point is this scenario is probably too specific to give good advice. Too many unknowns. The Roth might be the best way to go, probably is better than taking out a 9% loan. It may be better not to purchase the company stock, but impossible to say without knowing anything about the company or the posters financials

 

[KnappShack]

I think the point is you will never be able to 'catch up' to where you were before if you were already putting in the max/yr. But if you weren't maxing out before, you could catch up by maxing out after. Correct?

Is that really "catching up"? The funds you pull are gone. If you can pump up your contributions later that still doesn't replace what was taken. That opportunity is gone.

$35k @ 9% over 20 years is $196,000 of tax free money at the end.

Better be some good stock to beat the market even with tax implications.

 

[cyphoon]

A) Am I correct that I can withdraw Roth contributions without issue? (Setting investment growth issues aside).

Beware that there is a 5 year rule on withdrawing Roth money that was converted from a traditional IRA. You don't have to worry about this if all your contributions were normal contributions

If interest rates were still down by 3 pct, I would go the HELOC route. But in our current state, withdrawing from a Roth may be preferable to paying 8 % interest, as long as you are not putting your retirement at risk. Another option is a 401k loan if your plan allows it. There are some tax advantages to the interest that you pay.

Some cons of withdrawing from your Roth:

1- You can't replenish the money very quickly
2- Investment returns in a Roth are never taxed. By withdrawing, you are forever losing out on the tax savings of a $35,000 investment.
3- Your Roth money is likely highly diversified. Taking a withdrawal so you can own stock in a single company increases your risk
4- Roth money is important if you want to retire early.

I listen to some financial podcasts where they talk about using a Roth as a second level emergency fund: ie one or two months of expenses in regular savings, and the rest of the emergency fund being Roth money. This made more sense when interest rates were super low and your savings acct didn't pay squat.

I may be withdrawing from my Roth this year to pay for part of a home addition. I was hoping to retire at 57, but this withdrawal might force me to work one more year.

H

 

[KnappShack]

Seems like a situation better fleshed out with an advisor rather than on a sports message board.

Financial CF is the best CF.