Completely liquidate risky Roth IRA to pay for law school? Forum

[Puttanesca]

I know that there are a number of threads out there on using retirement funds to pay for law school, and I have gone through most/all of them. There seems to be a great deal of mixed advice on whether it is a good idea to withdraw retirement funds. I am considering completely liquidating my Roth IRA for law school. My IRA has wildly varying rates of return (think negative 40% to greater than 50%), and I want to make sure I cut my losses. Last year my rate of return was over 50% but I have already lost more than 10% this year. Given the extreme unpredictability of my IRA rate of return, would it be best to completely liquidate my IRA? My IRA would cover about 1 year of law school.

[firemed]

Do you have any other retirement assets, or is this it?

[Puttanesca]

Do you have any other retirement assets, or is this it?

No, just the Roth IRA.

[Danteshek]

Yes, I think liquidating your contributions (not earnings) to your Roth is a good idea. You can avoid taking on more debt and the accompanying origination fees.

[d34d9823]

I know that there are a number of threads out there on using retirement funds to pay for law school, and I have gone through most/all of them. There seems to be a great deal of mixed advice on whether it is a good idea to withdraw retirement funds. I am considering completely liquidating my Roth IRA for law school. My IRA has wildly varying rates of return (think negative 40% to greater than 50%), and I want to make sure I cut my losses. Last year my rate of return was over 50% but I have already lost more than 10% this year. Given the extreme unpredictability of my IRA rate of return, would it be best to completely liquidate my IRA? My IRA would cover about 1 year of law school.

Can you not just reallocate it to a more stable option?

[albusdumbledore]

I know that there are a number of threads out there on using retirement funds to pay for law school, and I have gone through most/all of them. There seems to be a great deal of mixed advice on whether it is a good idea to withdraw retirement funds. I am considering completely liquidating my Roth IRA for law school. My IRA has wildly varying rates of return (think negative 40% to greater than 50%), and I want to make sure I cut my losses. Last year my rate of return was over 50% but I have already lost more than 10% this year. Given the extreme unpredictability of my IRA rate of return, would it be best to completely liquidate my IRA? My IRA would cover about 1 year of law school.

Can you not just reallocate it to a more stable option?

Yes, this is what I'd do. Just put it in an index fund or something. Liquidating is a bad idea IMO.

[Danteshek]

Yes, I think liquidating your contributions (not earnings) to your Roth is a good idea. You can avoid taking on more debt and the accompanying origination fees.

Actually, I would do it only to avoid taking on grad plus or private loans. Low interest federal debt is good debt.

[firemed]

I wouldn't do it. Let that sit for 30 more years and I bet it will go up nicely.

Or roll it into a less risky retirement option.

[vanwinkle]

"Move to a less risky investment" is probably the best idea, unless you absolutely need the money right now.

[Puttanesca]

Thanks for all the input!

Can you not just reallocate it to a more stable option?

Yeah, I should be able to.

Liquidating is a bad idea IMO.

I know that in the long run, I would probably end up with more money if I don't liquidate and take out loans instead, but I guess ITE I'd rather not be burdened with too much debt.

Anyone else? Thanks

[LoyalRebel]

Law school itself is an investment. Your IRA can't be any more risky than your law school investment, and if you keep your IRA you'll have two extremely risky investments going at the same time. If you get rid of your IRA to pay for law school, you will have eliminated the risk for both investments.

You will have hedged off potential high returns and losses, but in this economic climate (think: DOW yesterday) that's not a bad thing.

[vanwinkle]

Law school itself is an investment. Your IRA can't be any more risky than your law school investment, and if you keep your IRA you'll have two extremely risky investments going at the same time.

The logic here is just outright ridiculous. WTF. Seriously.

[firemed]

Law school itself is an investment. Your IRA can't be any more risky than your law school investment, and if you keep your IRA you'll have two extremely risky investments going at the same time.

The logic here is just outright ridiculous. WTF. Seriously.

+1

I don't even know where to start.

[NYC Law]

If you can get more than 8% in a more stable option do that, if you can't then use it for law school - but commit to repaying it as quickly as possible to make up for not having to repay loans (ie pay what you would have paid in repayments into investments/savings instead)

[albusdumbledore]

Law school itself is an investment. Your IRA can't be any more risky than your law school investment, and if you keep your IRA you'll have two extremely risky investments going at the same time. If you get rid of your IRA to pay for law school, you will have eliminated the risk for both investments.

You will have hedged off potential high returns and losses, but in this economic climate (think: DOW yesterday) that's not a bad thing.

(E) The author equivocates on the term investment.

[Puttanesca]

If you can get more than 8% in a more stable option do that, if you can't then use it for law school - but commit to repaying it as quickly as possible to make up for not having to repay loans (ie pay what you would have paid in repayments into investments/savings instead)

Sounds like solid advice, thanks.

ITE, is it better to minimize law school debt as much as possible even if it means sacrificing some retirement money? I really don't want to end up in a situation where I have lots of debt and a low-paying job when that debt could have been avoided by using my retirement funds. I cannot repay my loans using my IRA without the 10% early withdrawal penalty, but I can pay my tuition with the IRA with no early withdrawal penalty.

[shastaca]

You actually have three, or six, or nine questions here--depending on whether you look at it by the year, semester, or quarter.

You can make the decision this year and then be forced to get loans the last two years.

You could get loans this year and use the Roth for next year, or use the Roth for your last year after accruing debt the first two.

I'd consider using the loan this year and next and using the IRA the third year which is likely to be the most expensive anyway. Tuition does go up every year doesn't it?

I'd also put it into something more stable for short term, and in terms of a retirement account short term is two years. The high risk/volatility of your current instruments usually pays off in the long term for retirement. But any investment counselor will tell you after you are retired and starting to use the funds it is time to put them into lower interest lower risk instruments.

You could of course use the funds this year and gamble on doing extremely well so that the school picks up much of the tab for the last couple of years.

[schooner]

...

[Puttanesca]

Thanks for your input, shastaca and schooner. Would it be better to use savings rather than IRA to pay for law school? The reason I thought I would use the IRA is because I feel like I have plenty of time to make up for whatever I take out and even though I would be losing out on the years of compounding, I would still end up with enough for retirement if I start contributing to a retirement plan as soon as I begin working. I'll be 25 when I graduate from law school, so I'll still have a good 40+ years of working life.

[schooner]

...

[LoyalRebel]

Law school itself is an investment. Your IRA can't be any more risky than your law school investment, and if you keep your IRA you'll have two extremely risky investments going at the same time.

The logic here is just outright ridiculous. WTF. Seriously.

+1

I don't even know where to start.

You could start by saying why it's ridiculous. Is it:

"Because law school is not an investment?"
I don't see how it's not. You're putting up a (large) sum of money and time now in hopes that it will generate profit in the future.

"Because choosing to go to law school is not a risky venture?"
lol.

"Because if he invested in law school (risky) and a highly volatile IRA at the same time, that would somehow not have 2 risky investments going?"
wat.

"Because law school and the IRA are not the same type of investment"
So?

[Tiago Splitter]

If you can get more than 8% in a more stable option do that, if you can't then use it for law school - but commit to repaying it as quickly as possible to make up for not having to repay loans (ie pay what you would have paid in repayments into investments/savings instead)

Sounds like solid advice, thanks.

ITE, is it better to minimize law school debt as much as possible even if it means sacrificing some retirement money? I really don't want to end up in a situation where I have lots of debt and a low-paying job when that debt could have been avoided by using my retirement funds. I cannot repay my loans using my IRA without the 10% early withdrawal penalty, but I can pay my tuition with the IRA with no early withdrawal penalty.

Just wanted to clear something up here: Only the earnings on Roth distributions are subject to the early withdrawal penalty. All of your contributions come out tax and penalty free. If you use the money to pay tuition rather than student loans, you will avoid the penalty, but in either case the earnings are taxed.

I plan to use all of my Roth and pre-tax funds when I head to law school, but I can see the argument for going in a different direction.

[rcweedman]

If you use the money to pay tuition rather than student loans, you will avoid the penalty, but in either case the earnings are taxed.

I plan to use all of my Roth and pre-tax funds when I head to law school, but I can see the argument for going in a different direction.

I'm in the same position as OP and have decided to use my roth IRA to partially pay for my first semester. I have about 20K and I calculated that after 3.5 years at 7.9%, a grad plus loan debt of 20K will turn into about 30K. I see it as locking in a guaranteed return of 7.9% (which is pretty good and that's not even considering the origination fee). Paying the taxes on gains complicates matters but I expect to be in the lowest of tax brackets and so it might not matter that much.

I do recognize that it is a gamble. I am trading my retirement savings now for the potential to have an even better retirement in the future. It could all go terribly wrong and I could end up with terrible job prospects and NO retirement savings. that would suck to say the least.

[rcweedman]

Of course if you KNOW you will participate in a LRAP then you shouldn't use a dime of your money to pay for school.

[Puttanesca]

Just wanted to clear something up here: Only the earnings on Roth distributions are subject to the early withdrawal penalty. All of your contributions come out tax and penalty free. If you use the money to pay tuition rather than student loans, you will avoid the penalty, but in either case the earnings are taxed.

I plan to use all of my Roth and pre-tax funds when I head to law school, but I can see the argument for going in a different direction.

Thanks for clearing that up. I was aware that contributions come out tax/penalty free but I know that was not at all clear from my post.

Of course if you KNOW you will participate in a LRAP then you shouldn't use a dime of your money to pay for school.

I will be trying for a judicial clerkship or biglaw, so if all goes well. I cannot use LRAP.