Is it worth the hit you take on the taxes to pay off loans instead of contributing the money to your 401K
2006-09-27 04:41:40 · 9 answers · asked by riccovega 1 in Business & Finance ➔ Investing
I have over $100,000.00 in the 401K account now. I probably have 20 years of work left. I have a home loan, car loan, and a couple of persona; ;oans, totalling $150,000. Between my 401K and Cafeteria accounts, I would have an extra $193.00 on my check to apply towards these loans. I was told I would lose $51.00 in tax savings a week. Do I save that in interest by paying off the loans quicker?
2006-09-27 05:13:29 · update #1
Please please please do not take "yes" or "no" as an answer to this question. I have been through this before, and I have gotten professional advice (some for free on the internet, e.g. check out Suze Orman's web site) on this exact same situation.
Brief summary of steps you should do:
1. if your company matches your 401K contribution, put in the the amount to take full advantage of that.
2. check historical performance of your 401K's account and compare that with the interest you are paying for your loans. Then if paying off is still an option, start paying off the non-mortgage (not tax deductible) first. Then redo 1 & 2 until you pay off all loans.
In details:
1. does your company match your 401K contribution? If no, your basic/lowest return on this is just the return of your 401K contribution, simplying things a bit (in favor of pay-off bank loans.) If yes, you must take advantage of that to get the matching amount as your free return. Some companies do match from 25% to 100% of your contribution, up to a max. In these instances, you must contribute to the max amount to optimize the matching of your company. THIS IS A MUST.
2. you seem to have put money into 401K for a while now, to get to that 100K level. In that case, you should check your 401K account's performance to get an idea of its performance. For example, look at the last 6 years, including some bad years from 2000 to 2002 and some very good years from 2003 to now, and you will actually get a very good reading of your 401K's average annual return. This is the return that you will lose if you are to pay off the loans, so it is important to know this. Note that all these returns are "tax-deferred", meaning your gain will be accumulated in your 401K account without your paying tax now.
3. what is the combined interest of your bank loans? If there is a mortage loan or loans whose interest payments are tax-deductible, you should take that into consideration also.
4. Compare the return in #2 (tax-deferred) with the interest in #3, and make your decision of whether you should pay off the loan now or later.
For example, if your 401K's return is about 10% and your loans' interest is about 5% (after tax consideration), then of course you should contribute to 401K plan and pay the loans gradually over their lifetime. Please note that if you have multiple loans, you also have options to pay off the high-interest loans first.
Good luck!
2006-09-27 07:00:42 · answer #1 · answered by Novice 4 · 0⤊ 0⤋
Most likely the bank loans charge more than what 401K would bring in. Do the math calculate interest over life of the loan, earlier you payoff means that money goes in your savings and not to the bank.
2006-09-27 11:56:35 · answer #2 · answered by Kainoa 5 · 0⤊ 0⤋
Better to put the money in a 401K plan. The tax savings plus expected gain are greater than the interest you pay.
2006-09-27 11:49:07 · answer #3 · answered by Ranto 7 · 0⤊ 0⤋
yes... i would say pay off your loans first..then once u dont owe anything u will be so relieved .. the taxes u get hit with arent as bad as u think..without loan payments u can contribute more to your 401k
2006-09-27 11:50:18 · answer #4 · answered by Anonymous · 0⤊ 0⤋
pay loans 1st though I might not choke off the 401k completely. I would pay off the non-mortgage loans 1st as can not deduct that interest so they are the most expensive.
2006-09-27 14:35:53 · answer #5 · answered by vegas_iwish 5 · 0⤊ 0⤋
Pay off your loans 1st. That way, you'll be able to contribute MORE when you do a 401k.
2006-09-27 11:49:20 · answer #6 · answered by jeff the drunk 6 · 0⤊ 0⤋
The interest on loans is wasted money. Pay it off and then start contributing.
2006-09-27 11:49:01 · answer #7 · answered by dbackbarb 4 · 0⤊ 0⤋
as far as I am concerned it is far better to be out of debt, pay off the loans...taking on too much financially is a mistake I think a lot of people make these days
2006-09-27 11:49:35 · answer #8 · answered by chavito 5 · 0⤊ 0⤋
pay of loans
2006-09-29 07:20:32 · answer #9 · answered by Anonymous · 0⤊ 0⤋