Credit, Retirement 

0% Balance Transfer To Fund Roth IRA?

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I entertained a curious question over the weekend – Should someone take out a 0% balance transfer to fund a Roth IRA?

I think the answer is, as usual, that depends.

I see two basic scenarios (almost all other scenarios equal an automatic NO):

  • You expect a large tax refund but don’t have enough free cash now to fully fund the Roth IRA,
  • You don’t expect a large tax refund and you don’t have enough free cash now to fully fund the Roth.

Given that it’s June and you have until April of next year to save the $4,000 contribution limit, I think that if you’re in either category then a balance transfer should not be your first option. You should either reduce your withholding or start saving (you can contribute now, no need to wait until April, in fact it’s likely better to contribute now because your money will be working a few months longer).

Now, let’s say it’s March 15th and you just started thinking about taxes, in that case you might want to consider a balance transfer so you can contribute in the prior tax year instead of the next one. That’s one extra year of contributions which can be huge many many years down the road. If you’re in category one, the large refund group, then I say you can safety take that balance transfer because you can pay it off when it comes due with the tax refund. This, of course, assumes a level of discipline, requiring you to not spend a large dollar amount sitting in your bank account earning interest.

If you’re in category 2, taking a balance transfer is very risky because you didn’t save $4,000 this year, what’s to say you can save it next year? If you take on credit card debt and can’t pay it off before it starts accruing interest, you’re shooting yourself in the foot. The credit card debt at such a high interest rate will negate the benefits of having a Roth IRA in the first place. This also applies to those in category one who lack the discipline to save the money until the balance transfer is due. If you can’t pay off the balance transfer, and be honest with yourself, don’t even consider a balance transfer as a funding source for your Roth IRA.

{ 8 comments, please add your thoughts now! }

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8 Responses to “0% Balance Transfer To Fund Roth IRA?”

  1. plonkee says:

    If you don’t have the cash now, but have the space for the contribution in your budget (i.e. you have $500 pcm available for 8 months) and you did balance transfer arbitrage now, if the market goes up over the year you will have made money.

    Unless I’ve got something wrong?

  2. alex says:

    I realize the wise answer is usually “It Depends” but this answer bores me. There is something more entertaining about unwise, screaming, jumping up and down answers. I demand such answers from this blog. Less wisdom, more bread and circuses!

  3. Tim says:

    if you have the money already, i’d do it in a heart beat. not only will you earn interest on the money you already own, but you will potentially start earning return on the $4k in the roth. if you are pretty secure in your finances and have the amount budgeted over the next 12 months, i’d still do the BT.

  4. CPA1298 says:

    In January 2006 I took out $16k to max out the Roth IRAs for 2005 and 2006; it turned out great when I made a tax-free 18%. Paying them off was a little rough; I had the cash flow, but only barely.

  5. Richard says:

    Err.. keep in mind that even contributions are subject to withdrawal penalties within the first few (5?) years of opening….

  6. Patrick says:

    Wow. I hadn’t thought of that scenario. Your answer for paying into a Roth before the end of the tax year is a good one.

    Credit card arbitrage is not for everyone, and if you have researched it and determined it is a risk you can assume, then I agree, the 2 scenarios you laid out are just about the only ones where doing a balance transfer to fund a Roth is a good idea. The only other scenario I can think of that may make it worthwhile would be expecting a windfall of cash such as a bonus, raise, commission, etc. which would be enough to cover the fully funded Roth. Then you can pay the minimum on the credit card balance, then pay it off in full just before the interest kicks in.

  7. tinyhands says:

    In my mind this is equivalent to asking if you should invest a 12-month 0% APR loan in an 18-month (or more) CD: You better only do it if you’re SURE you can pay off the debt, because you’re going to going to wish you hadn’t if you can’t.

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