Is it smarter to max out 401k and IRA contributions rather than pay off student loans faster?

Question

Loan has 6% interest first year and 5% for the years following. Can take as long as 15 years, if necessary.
Is it smarter to maybe max 401k to employer contribution and only put half of max amount in IRA? Then, use the money not put in the IRA to pay off the loan much faster...

Answer 1

Fennell, I think it's sort of a judgment call on your part.

When you compare the low rate of interest on the student loan with potential tax deferred returns on your retirement investment, it would seem you come out ahead in terms of total dollars. On the other hand, you have to consider that not paying more on your student loans means less cash flow in the future because you're paying longer on the loans.

I tend to like your idea of maxing the 401(k) contribution, and put half or maybe even 25% of max into an IRA (by the way, you should probably do a ROTH IRA as opposed to a traditional one because it's tax-free retirement savings, not just tax-deferred). Double or triple up on the loan payments, use some of the money for non-retirement savings (i.e., a rainy day fund) and you'll probably be in better financial shape to really dig into retirement savings down the road as your income increases and your debt load shrinks.

Good luck!

Answer 2

If your student loans are fixed at 6% and 5% following, this is about the "best" debt you can have. It is low, fixed rate and you may get a tax deduction (based on certain income levels). So, if you are in a 30% tax bracket, you are really paying 4.2% and 3.5%.

If you receive a match for your 401k, atleast contribute the maximum amount your company will match to receive the free money. Also, since it is pre-tax dollars, you get a tax benefit too! You can't beat the power of starting young and compounding ther returns in your retirement account, expecially in a tax-advantaged vehicle like 401k and IRAs and it sets the stage for your savings plans.

If can juggle both, I would do both and contribute as much as possible to your 401k and Roth IRA with some additional payments to your student loans.

Answer 3

Personally, I would put the maximum match amount into the 401k and then pay off the student loan ASAP. So, let's say the company you work for matches up to 6%. I would put 6% in the 401k and then pay off the student loan quickly. Don't take 15 years. Do it in 2 if possible.

My reasoning is that if you are around 25, you have 45 - 50 years before retirement. Obviously, the sooner you get started on retirement funding, the better. However, if you drag out repaying your student loan for 15 years, then you have a good chance of running into financial trouble during those 15 years. If you can't put money in retirement for a couple years, that's bad, but not horrible. If you are allowed to find your happiness elsewhere (fired, laid off), I wouldn't want those student loan payments hanging over my head.

If you go this route, it is vitally important that you pay off the loans fast, fast, fast. Don't buy the plasma TV. Don't buy the new car. Do those things after taking care of the debt and fully funding your retirement.

Also when investing in IRA's, put your money in Roth IRA's. You pay the taxes on the money you put into them, but every bit of the money you take out at retirement is tax free. With a traditional IRA, you don't pay taxes up front but you do when you take the money out. Since you will hopefully be taking out more than you put in, it's better to pay taxes at your current tax bracket instead of the higher one when you retire.

Answer 4

Student loans cost 5% (after first year), stock market on the average returns about 10%. I know you can get better than 5% in bonds. So, it still seems like you can get a better than 5% return investing the money, so I'd put the money in the 401k/ IRA. Sounds like no tax considerations as 401K/ IRA money is tax deductible but student loans are not, so essentially this is a wash (if you invested the money in just a regular account it would not be tax deductible so this would be a consideration, but even taking this into account I still think you can beat 5%).

Answer 5

First, you are able to desire to close your account with the corporate who stated you purchase a Roth IRA/existence assurance product...they're valueless scum for suggesting it, and you have been "had", i'm afraid! existence assurance isn't "an investment"! could you purchase a automobile assurance product that grew to become into additionally a "low fee expenditures motor vehicle" that would desire to by no skill be properly worth under you paid in in case you have not got an twist of destiny? i'm guessing not, you will in all probability understand you are able to desire to purchase "general automobile assurance" far extra fee-effective & make investments the version your self to earn 7-12% a 365 days return! Drop those bums! Defer 10% into your 401(ok), and pay off as lots extra as you are able to submit to each month of the loans, even in spite of the incontrovertible fact that the interest is deductible... and examine a e book approximately worry-loose finance!

Answer 6

my rule of thumb is to invest when the expected rate of return is at least double the cost of the debt i'd pay down if i didn't invest.

in your case, i'll take as long as possible to pay off my student loans, especially if i get a tax deduction for the interest.


The purpose of the double rule is to allow for variation in the returns i'll actually receive while investing. the interest cost of the debt is certain, but investing returns are quite variable as the current stock market slump shows.


:-)