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.