You are throwing money away by holding a balance. Your first priority should be to pay off your credit card. ![]() However, there are income limits to opening a Roth IRA. You can withdraw money from a Roth without penalty, so if you have a medical emergency or you want to further your education at any point in your life, you can do that. One of the big advantages to a Roth IRA is the flexibility it affords. Gains from a Roth IRA, as you point out, are not taxable if the account has been up and running for five years and you are over 59½. There’s no age limit to opening a Roth IRA account, but the longer you leave the money in a Roth IRA or 401(k), the more that compound interest you will earn. Generally, Roth IRAs make most sense for younger people because they’re paying tax on the money they put into these accounts instead upon the withdrawal of the money from a Roth IRA and, when people are in their 20s, they tend to have a lower tax bracket. It’s always a good time to open a savings account. ![]() The entire withdrawal, including principal and earnings, counts as income on a future year’s aid application.” Though the tax law permits penalty-free withdrawals from a traditional or Roth IRA to pay for qualified college costs, doing so may jeopardize financial aid in a future year. “Be careful, however, about taking money out of your IRA (or any retirement account) to pay for college. Weller Group, a financial adviser, has some cautionary words. Assuming your teenager will be applying to college soon, it’s also worth remembering that your 401(k) is not taken into account calculations are taken for financial aid. You should need aim to have an emergency savings account in a high-yield savings account - perhaps a CD or online savings account, given that rates are currently relatively high. Having all your savings in a money-market account is not a great long-term plan. “You say it will give you peace of mind to know your house is paid off, which can feel temporarily empowering, but it’s a bad decision. That’s a rough figure, sure, but it illustrates that the administrator of your 401(k) plan and Uncle Sam will be helping themselves to your honey pot before you do. You could end up walking away with something closer to $66,000. ![]() Given that you earn a good salary, you could end up paying an income-tax rate of 32%. And then you will have to pay income tax on your withdrawal. I would have preferred for you to have refinanced your mortgage a couple of years ago when rates were lower, but assuming you did not do that, it’s still not a bad rate by current standards (the average 30-year fixed-rate mortgage now hovers at around 6.85%).įurthermore, you will have to pay a 10% penalty on withdrawing from your 401(k) before the age of 59½. On a practical level, you have a well-paid job and, if you bought your home in 2010, you’re probably paying an interest rate on a 30-year mortgage of around 4.69%, or thereabouts. Your anxiety about having your house paid off will be alleviated, but you may end up finding another reason for anxiety, and that reason may be regret at having plundered this work-based savings account. You say it will give you peace of mind to know your house is paid off, which can feel temporarily empowering and intoxicating - but it’s a bad decision. It might seem like dipping into that 401(k) honey pot will make your life easier.
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