SEP IRA is part cash, part stocks, tends to earn about 7 per cent per year. Cred card debt at about 8 per cent. SEP IRA contributions tax deductable. Female, age 51.
2007-03-26 05:14:07 · 5 answers · asked by Roger Peters 2 in Business & Finance ➔ Personal Finance
Assume you can put in an additional $5000 per year.
$5000 worth of interest on the credit card is -$400
$5000 worth of gain in the IRA is +350
Assuming you are in the %15 tax bracket, you would be able to save $750 in taxes.
In terms of building wealth, you would be better off dumping the maximum into your IRA.
2007-03-26 05:38:20 · answer #1 · answered by Vegan 7 · 0⤊ 0⤋
You don't mention having any other investments besides your SEP IRA. If that is the case then I would start accumulating some cash in a high yield savings or money market account.
Simultaneously (or alternatively) you should pay down that Visa because it can act as an "emergency account" if there is an emergency--you want to have room on your card if you desperately need it one day, especially if you don't have emergency savings.
Either way, pay off your VISA pronto--there's no reason to be paying 8% on a credit card balance. Earning 7% in your IRA is NOT guaranteed--the 8% interest you're paying IS.
2007-03-26 15:32:38 · answer #2 · answered by lizzgeorge 4 · 0⤊ 0⤋
Have you decided to stop using debt? Seriously, if you don't stop using the debt then you will never get a head. If you decide not to use credit again, sprint to get that Visa paid off as quick as possible. Since you have a GREAT start in your IRA, back off funding it while you pay off your Visa. But do it fast, fast, fast so then you can finish building wealth for retirement. Don't take money out of retirement to pay this off. The penalties are too steep.
I suggest you read The Total Money Makeover by Dave Ramsey. Sounds like you are in step 2 on his baby steps (I am assuming you have at least $1000 in an emergency fund for emergencies). You should be debt free in 2 years or less if you don't have more than $1000 in an emergency fund. If you have more than $1000 in an emergency fund, then use the excess to pay down the VISA. When the VISA is paid off then you build up 3-6 months of expenses for an emergency fund then put 15% of your income into retirement.
Interest rates don't matter in getting out of debt. Debt always takes away from investing in your future. The faster you don't have debt the faster you get to spend that money on things you want to purchase!
2007-03-26 12:33:01 · answer #3 · answered by mldjay 5 · 0⤊ 0⤋
I would pay the debt. That is a known 8% that you're paying out of your pocket. Hopefully you've got some diversity in your portfolio like a good broad stock fund and or bonds. I like Vanguard's S&P 500 index, but I don't have as much as you.
It's not an "investment" because of all the little costs, but there are some tax advantages of owning a home to consider. That is fairly decent debt to have. Also, if you have a car loan, consider paying that off too.
Hope this helps
2007-03-26 13:04:53 · answer #4 · answered by OiVey 4 · 0⤊ 0⤋
Even taking the deffered taxes into consideration, ultimately the debt is losing you more than the investment is earning you, so the mathematically smartest thing to do is pay down the card.
This would probably still be the smartest thing do even if it was close, because of the unexpected "peace" you will feel the morning you wake up with no debt!
Good luck!
2007-03-26 12:38:28 · answer #5 · answered by Anonymous · 0⤊ 0⤋