How to Use Your Roth IRA For A Vacation

by Redeeming Riches on March 27, 2012

The other day I overheard a few friends talking about their honeymoon in Hawaii.  My wife and I would love to go on a trip to Hawaii, but it’s just a little too expensive for us right now.  That is, unless you cash in your Roth IRA to go on vacation.

That’s exactly what this couple did, and they were enjoying the Hawaiian sun in no time.  Here’s how the couple put it:

“We rolled our 401(k) into a Roth IRA and then cashed it out.  It wasn’t a lot, but it was enough to cover the honeymoon.”

You heard right, ‘enough to cover the honeymoon.’

OK folks, I can’t take it any longer.  This was a terrible idea.

Let’s just say a honeymoon to Hawaii cost $2,500 – and I’m probably being conservative.  If you cashed out your Roth IRA early, you’d be paying a minimum of a 10% penalty.  $250 down the drain just like that.

Even more, the interest earned would most likely be taxable to you.  Bad move.

That $2,500 may not have seemed like anything for this young couple, but it was the only savings they had towards retirement.  Now they’re starting from scratch again, and will probably make another bonehead move in the future.

Not only did they hurt themselves today with the 10% penalty, they threw away $40,000 in future money.  That measly $2,500 grows to become $40,000 at 7% interest over the next 40 years.  That’s a lot of money to sacrifice just for a trip to Hawaii.

The bottom line: don’t use your Roth IRA for a vacation.  It’s not worth it and you’ll be wishing you hadn’t in the future.

This post was part of the Roth IRA movement hosted by Jeff Rose at Good Financial Cents.  Check out the other 140 articles about Roth IRAs and get started with yours today!

 

What do you think?  Is it ever good to use retirement funds to go on a vacation?

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