Does it make sense to take out student loans to start an IRA?
Depending on the student loan, this may be improper usage of the funds.  I know the federal loans I received years ago were to be used for education related expenses only.  I would imagine most, if not all, student loans would have the same restrictions. Bonus Answer: You must have earned income to contribute to an IRA (e.g. money received from working (see IRS Publication 590 for details)).  So, if your earmarked money is coming from savings only, then you would not be eligible to contribute.  As far as whether you can designate student loans for the educational expenses and then used earned income for an IRA I would imagine that is fine.  However, I have not found any documentation to support my assumption. "IRA contributions are limited; you cannot ""dump the excess into a retirement account like an IRA"" if the excess is more than $5500. Furthermore, as @firefly points out, you need to have earned income (technical term is compensation and it includes self-employment income, not just wages) to contribute to an IRA, and the limit mentioned above is actually the lesser of your earned income and $5500. (There are other limitations for people with high gross income, but these likely will not affect you) On the positive side, if your earned income is small, you can contribute your entire taxable earned income including the money withheld by your employer for Social Security and Medicare tax and Federal, State and local income taxes to an IRA, not just your take-home pay. For example, if your earned income is $5500 and take-home pay after tax withholding is $5000, you are still entitled to contribute $5500. So, where do you get that withheld money from so that it can be put into your IRA? Well, it can come from the student loan or interest earned from a bank or from the dividends and capital gains on your investments, etc. Money is fungible; it is not the case that only the cash received (or deposited into your bank account) as your take-home pay can be contributed. Subject to other limitations mentioned, your earned income can be contributed, not just your take-home pay." I will split my answer in a few sections... Note: I will not address the legal aspect of the question. If you can or not use Federal money to invest. 1st - Investments with Student Loan 2nd - IRA as the Instrument I hope this helps! "I'd check the terms of the student loan. It's been a long time since I had a student loan, but when I did it had restrictions that it could only be used for educational expenses, which they pretty clear spelled out meant tuition, books, lab fees, I think some provision for living expenses. If your student loan is subsidized by the government, they're not going to let you use it to start a business or go on vacation ... nor are they likely to let you invest it. Even if it is legal and within the terms of the contract, borrowing money to invest is very risky. What if you invest in the stock market, and then the stock market goes down? You may find you don't have the money to make the payments on the loan. People do this sort of thing all the time -- that's what ""buying on margin"" is all about. And some of them lose a bundle and get in real trouble."
Given that money can go into the 401(k) pre-tax, and that once the   loan is paid off, the principal is restored, I'm having a hard time   seeing the downside of this approach. Am I missing something or does   it actually make sense in my situation? You're missing several things. Here's a list of what I could think of: You should make sure that none of these issues is a problem for you. There are a couple reasons for having a Traditional or Roth IRA in addition to a 401(k) program in general, starting with the Traditional IRA: With regards to the Roth IRA: Also, both the Traditional and Roth IRA allow you to make a $10,000 withdraw as a first time home buyer for the purposes of buying a home. This is much more difficult with the 401(k) and generally you end up having to take a loan against the 401(k) instead. So even if you can't take advantage of the tax deductions from contributions to a Traditional IRA, there are still good reasons to have one around. Unless you plan on staying with the same company for your entire career (and even if you do, they may have other plans) the Traditional IRA tends to be a much better place to park the funds from the 401(k) than just rolling them over to a new employer.  Also, don't forget that just because you can't take deductions for the income doesn't mean that you might not need the income that savings now will bring you in retirement. If you use a retirement savings calculator is it saying that you need to be saving more than your current monthly 401(k) contributions? Then odds are pretty good that you also need to be adding additional savings and an IRA is a good location to put those assets because of the other benefits that they confer. Also, some people don't have the fiscal discipline to not use the money when it isn't hard to get to (i.e. regular savings or investment account) and as such it also helps to ensure you aren't going to go and spend the money unless you really need it. "I'll add 2 observations regarding current answers.  Jack nailed it - a 401(k) match beats all. But choose the right flavor account.  You are currently in the 15% bracket (i.e. your marginal tax rate, the rate paid on the last taxed $100, and next taxed $100.) You should focus on Roth. Roth 401(k) (and if any company match, that goes into a traditional pretax 401(k). But if they permit conversions to the Roth side, do it) You have a long time before retirement to earn your way into the next tax bracket, 25%. As your income rises, use the deductible IRA/ 401(k) to take out money pretax that would otherwise be taxed at 25%.  One day, you'll be so far into the 25% bracket, you'll benefit by 100%   traditional. But why waste the opportunity to deposit to Roth money   that's taxed at just 15%? To clarify the above, this is the single rate table for 2015:  For this discussion, I am talking taxable income, the line on the tax return designating this number. If that line is $37,450 or less, you are in the 15% bracket and I recommend Roth. Say it's $40,000. In hindsight on should put $2,550 in a pretax account (Traditional 401(k) or IRA) to bring it down to the $37,450. In other words, try to keep the 15% bracket full, but not push into 25%.  Last, after enough raises, say you at $60,000 taxable. That, to me is ""far into the 25% bracket."" $20,000 or 1/3 of income into the 401(k) and IRA and you're still in the 25% bracket. One can plan to a point, and then use the IRA flavors to get it dead on in April of the following year.  To Ben's point regarding paying off the Student Loan faster - A $33K income for a single person, about to have the new expense of rent, is not a huge income. I'll concede that there's a sleep factor, the long tern benefit of being debt free, and won't argue the long term market return vs the rate on the loan. But here we have the probability that OP is not investing at all. It may take $2000/yr to his 401(k) capture the match (my 401 had a dollar for dollar match up to first 6% of income). This $45K, after killing the card, may be his only source for the extra money to replace what he deposits to his 401(k). And also serve as his emergency fund along the way." It's generally considered a bad idea to take a loan from your 401k, for the following reasons: You don't earn returns while the money is out You pay the loan back with after-tax money It's only considered a good idea for emergencies or where you need the money to pay off high interest rate debt like credit cards. Consider the stability of your employment, the expected rate of return and explore other avenues for funds  Source: MSN Money "I'd first put it in CDs or other short term account. Get through school first, then see where you land.  If you have income that allows you to start a Roth IRA, I'd go for that, but keep it safe in case you actually need it back soon. After school, if you don't land a decent job fast, this money might be needed to live on. How long will it last if you take a few months to find work?  If you do find a good job, moving, and setting up an apartment has a cost. Once you're there, I'd refer you to the many ""getting started"" Q&As on this site." (Note: The OP does not state whether the employer-sponsored retirement savings are pre-tax or post-tax (such as a Roth 401(k)). The following answer assumes the more common case of a pre-tax plan.) This is a bad idea, IMHO. IRS Pub 970 lists exceptions to the 10% early withdrawal penalty for educational expenses. This doesn't include, as far as I can tell, student loan payments. So withdrawing from your retirement account would incur both income tax and penalties. Even if there were an exception, you'd still have to pay income taxes, which, depending on the amount and your income, could be at a higher marginal rate than you are currently paying.  If you really want the debt gone as soon as possible, why not reduce the amount you contribute to the retirement plan (but not below the amount that gets you the maximum employer match) and use that money to increase your monthly payments to the student loan? Note that, if you do this, you will pay taxes on income that would have been tax-deferred in order to save money on interest, so there's still a trade-off. (One more thing: rather than rolling over to your new company's plan, you could roll over to a self-directed Traditional IRA.) It would probably never make sense to do that. Why would you? You'll end up in the bankruptcy court either way, since you won't be able to pay off the loan, and you cannot maintain the monthly payments without getting into more debt. IRA is shielded from bankruptcies, in most States, so it will probably stay with you afterwards. In any case - it will provide you some income when you're old and cannot keep up working. Unfortunately, Federal student loans are also shielded, but the rest of you debt - isn't. I suggest trying to fix your budgets and see how you can improve your earnings to be able to maintain your payments. I can't understand how you could have racked up $140K student debt and have a career at which you earn $55K/year for an experienced employee. "In general taking money out of a 401k to repay a loan is a bad idea for a number of reasons.  Taxes and penalties if you are under 59 and 1/2 you will pay a 10% penalty on withdrawals from a traditional 401k plan. Then you are going add the amount you withdraw to your income in determining your current tax bill. If you make a large withdrawal you will likely push yourself into a higher tax bracket and will end up paying additional taxes than if you made several smaller withdrawals or waited until retirement when your income would presumably be lower. Taxes and penalties will mean you will need to withdraw ~225k in order to pay taxes and penalties while still having 150k to pay toward the mortgage (this assumes you are single and have no other income). You miss out on the growth your 401k could have had.  Lack of diversification the average person has the majority of their net worth tied up in their home and by paying off your mortgage you are putting even more of your money into residential real estate. By moving money from a 401k to your personal residence you could also lose some protection from creditors and lawsuits. Retirement accounts are generally off limits to creditors where as your house is limited by the homestead exemption (varies greatly from state to state). There are a few times when it might makes sense to use 401k money to pay off a mortgage. If you are older than 59.5 and have little tolerance for risk it might make sense to take the amount of money between your current income and the next higher tax bracket and ""invest"" the money in your mortgage each year. You would still want to avoid taking out a large chunk at one time though to avoid pushing yourself into a much higher tax bracket." Plus you already have money in a 529 plan that is meant for college expenses (and cannot be used to pay student loans) - use that money for what it's for. I disagree with @DStanley, as a current college student I would say to take out loans. Most of the time I am against loans though.  So WHY? There are very few times you will receive loans at 0% interest (for 4+ years). You have money saved currently, but you do not know what the future entails. If you expend all of your money on tuition and your car breaks down, what do you do? You can not used student loans to pay for your broken car.Student loans, as long as they are subsidized, serve as a wonderful risk buffer. You can pay off your loans with summer internships and retain the initial cash you had for additional activities that make college enjoyable, i.e - Fraternity/ Sorority, clubs, dinners, and social nights. Another benefit to taking these loans would assist in building credit, with an additional caveat being to get a credit card. In general, debt/loans/credit cards are non-beneficial. But, you have to establish debt to allow others to know that you can repay. Establishing this credit rating earlier than later is critical to cheaper interest rates on (say) a mortgage.  You have made it through, you have watched your expenses, and you can pay your debt. Finish It. If you do it right, you will not have loans when you graduate, you will have a stunning credit rating, and you will have enjoyed college to its fullest potential (remember, you only really go through it once.) But this is contingent on:  Good luck,  EDIT: I did not realize the implication of this penalty which made me edit the line above to include: (to the extent you can per year) For now, student loan repayment isn't considered a qualified educational expense. This means that if you withdraw from a 529 to pay your debts, you may be subject to income taxes and penalties.Source Furthermore,  Currently, taxpayers who use 529 plan money for anything other than qualified education expenses are subject to a 10% federal tax penalty. Source My advice with this new knowledge, save your 529 if you plan on continuing higher education at a more prestigious school. If you do not, use it later in your undergraduate years. One can have a self-directed IRA. This is not like a Schwab, eTrade, etc IRA. It has a special type of custodian that knows how to manage it.  I became aware of such an account as a way to purchase a rental property. There were two issues. The type of property I looked at wasn't anything a bank was willing to finance. And the rules regarding self dealing added a potential layer of expense as I technically could not perform the simplest of things for the property.  For you, the obstacle looks like self-dealing. Any IRA can only be funded with cash or transfer/conversion from another IRA/401(k). I don't know how you would get the intelligent property into the IRA in the first place. Once you own a patent, or anything else, you can't sell it into the IRA.  It's at times like this that member littleadv would suggest this is the time to talk to a pro before you do anything hazardous to your wealth. "Here are the risks involved with student loans: So - what happens if you decide (or are forced) not to finish school (50% of students don't)?  You have no degree to boost income, but still have the debt.   What happens when you graduate and want to use that saved cash buy a house, car, etc., and treat the student loans as a monthly bill?  The next thing you know you're loan-poor and are struggling to make your monthly payments just like most other ""normal"" people. You aren't going to earn significant interest on your cash while you're in college (and it will not outpace inflation), and there's significant risk of your college savings losing money if they're not in risk-free investments, so it would NOT be wise to take out student loans when you have the means to cash-flow it. Also, student loans generally charge a roughly 1% fee, so that actually negates the interest you earn in your savings account. Plus you already have money in a 529 plan that is meant for college expenses (and cannot be used to pay student loans) - use that money for what it's for." "Already a lot of great answers, but since I ask myself this same question I thought I'd share my 2 cents.  As @user541852587 pointed out, behavior is of the essence here. If you're like most recent grads, this is probably the first time in your life you are getting serious about building wealth. Can you pay your loans down quickly and then have the discipline to invest just as much -- if not more -- than you were putting towards your loans? Most people are good at paying bills in full and on time, yet many struggle to ""pay themselves"" in full and on time.  As @Brandon pointed out, you can do both. I find this makes a great deal of practical sense. It helps form good behaviors, boosts confidence, and ""diversifies"" those dollars. I have been paying double payments on my student loans while at the same time maxing out my IRA, HSA, & 401k. I also have a rental property (but that's another can of worms). I'm getting on top and feeling confident in my finances, habits, etc. and my loans are going down. With each increase in pay, I intend to pay the loans down faster than I invest until they're paid off.  Again -- I like the idea of doing both." If the IRA is costing you $100 a year, you should almost certainly transfer it to a cheaper provider, regardless of whether you're going to withdraw anything.  You can transfer the IRA to another provider that doesn't charge you the fees.  Or you can convert it to Roth and combine it with your existing Roth.  Either way, you will keep all the money, and save $100 per year in the future. If you want to take money out of your retirement accounts, you should take it out of your Roth IRA, because you can withdraw contributions (i.e., up to the amount you contributed) from the Roth without tax or penalty. Whether you should withdraw anything from your retirement accounts is a different question.  If you're already maxing out your Roth IRA, and you have sufficient retirement savings, you could just instead plow that $5500 into your student loans.  (If you can afford it, of course, it'd be better to just pay the $7500 from your income and still contribute to the retirement accounts.)  There's no reason to withdraw from retirement accounts to pay loans when you could just divert current income for that purpose instead. Think about contributing to both a Traditional IRA and a Roth IRA if you have the funds. In theory, you could receive the lowest tax rates by depositing money into a regular IRA during years of democratic rule, depositing money into a Roth during years of Republic rule, and then withdrawing from the Roth during democratic rule and the tradition during Republican rule. Then you would be depositing with lower tax rates and withdrawing with lower tax rates. Granted this method would involve some speculation. I think it will be some time before we see the full effect this legislation will have on the overall markets. Insurance, as an industry is a tricky beast. Logically speaking for an industry outsider it may make sense that with more customers the insurance industry will mak emore money but, in actuality many people who could not previously get insurance are going to be getting insurance. What this means is that though the insurance companies will have more clients thier costs are likely to go up substantially. Which in turn will create downward pressure on profits and as a result stock prices.