HELOC or IRA

[bones72]

Ok, i have a loan for 12500,36mo,8.5. Payments are easy, don't have other debt other than mortgage. Should I attack this loan with what I contribute to my IRA, or just let it ride and pay it on the schedule? I do listen to Dave Ramsey, and he would say to suspend IRA contributions and pay this loan off early. But I wonder what you guys would say.

[EconoMutt]

I'm sure you'll get a variety of answers on your question.
The first thing I would do is save 3 to 6 month's of emergency money before
the IRA or loan payoff.

[bones72]

I actually have enough to in the Big Ef to wipe out this note, about a year's worth of expenses. But this isn't an emergency, I'm just wondering if I should stop contributing to my IRA until this note is toast.

[EconoMutt]

I'd keep contributing to the IRA.
I think it will pay off in the long run.
Don't tell Dave Ramsey I said that. :-)

[bones72]

LOL, yeah, he'd pitch a fit. Thanks!

[Bimmer]

How old are you? That is a very important question when people ask about these things.

[creditcardfree]

Is it really an either or question?

Can you still contribute to your IRA and pay extra on the loan?

If for some reason, you are contributing more than 10-15% of your income to retirement then I would knock down the contributions to pay off the loan quicker.

[ea1776]

8.5% interest rate?

I suppose I would prefer paying off the debt if so, but maybe you can do both? Pay 50% more than minimum on debt and take that out of what you would have contributed to your IRA.

I would also pay attention to your tax bracket. If you are in a high tax bracket (higher than 15%), I would definitely do the IRA to get that automatic "return" and shelter some more income from taxation.

Still, 8.5% is pretty high, and expecting (even a long term) rate of return on that in investments might be too optimistic.

Then again, tax sheltered gains do rule!

[KTP]

Since you can pull out any money you contribute to a IRA tax free and penalty free, wouldn't it somewhat make sense to keep your EF in your IRA if you are faced with an either/or situation? You can have the IRA invested in a laddered CD just like you would the EF with the advantage that you pay no taxes on the interest of your EF (since it is in your IRA).

[creditcardfree]

Originally Posted by KTP

Since you can pull out any money you contribute to a IRA tax free and penalty free, wouldn't it somewhat make sense to keep your EF in your IRA if you are faced with an either/or situation? You can have the IRA invested in a laddered CD just like you would the EF with the advantage that you pay no taxes on the interest of your EF (since it is in your IRA).

I pretty sure this only applies to Roth IRA's. The contributions could be pulled out penalty and tax free. It is still a good idea to have an emergency fund seperate from your retirement, so that you don't have to dip into your retirement funds in an emergency.

[bones72]

To clarify my question, Is it more important to pay off debt or to contribute to my IRA? And no, I don't have enough in my IRA at 48. But, it's still paying off debt!

[disneysteve]

Originally Posted by bones72

To clarify my question, Is it more important to pay off debt or to contribute to my IRA?

If you must pick one, I'd pay off high interest debt, and yes, 8.5% would qualify as high interest.

In this situation, though, that probably isn't what I'd do. I would want to know more about your finances and why you feel you have to pick one or the other. You have no other debt and this loan isn't for a large amount (though the interest rate is ridiculous).

[creditcardfree]

At your age, I don't think I would stop contributing to your IRA, but I would make every effort to pay the loan off early. I would cut expenses, sell things I don't need, stop buying lattes or whatever luxury/vice you may have.

I would use the extra funds to pay extra on that loan. Little amounts add up and can make a big difference in how quickly you pay off the loan, as well as how much interest you pay.

[bones72]

It' not an either or situation. I have just now renewed my automatic contribution to my IRA. There is enough left over to pay about 35% extra to the loan, which will pay it off in July, 2011.

[disneysteve]

Originally Posted by bones72

It' not an either or situation. I have just now renewed my automatic contribution to my IRA. There is enough left over to pay about 35% extra to the loan, which will pay it off in July, 2011.

That's great. Definitely the way to go. Prepay the debt AND fund the IRA.

[Nodebt13]

what type of loan? why 8.5 that is high on residencial Mortgage.

If you can put it down to 6 to 5% You will save a lot of money.

you can get a heloc for less thant 8.5 and transfer a portion to the Heloc.

0 closing cost, at your local bank.

[LMA]

8.5% is pretty high. Are you getting a return better than that on your IRA?

If not, then payng off the debt might make more sense. I agree with doing both, still contribute to your IRA but have the bulk of it go to debt.

[jIM_Ohio]

Originally Posted by bones72

To clarify my question, Is it more important to pay off debt or to contribute to my IRA? And no, I don't have enough in my IRA at 48. But, it's still paying off debt!

8.5% is not high, but its not low either. Because the interest is tax deductable, and the loan is secured (with a house), it is not "debt" in a bad sense.

What it comes down to is what is your goal?

Be debt free as soon as possible?
Be financially secure as soon as possible?
Retire as soon as possible?
goal could be something else, but I want to limit my response to only 3 variables.

If goal is being debt free ASAP, no brainer, suspend IRA and pay off the loan.
If goal is being able to retire ASAP, more info needed, but 90% of the time you will want to continue the IRA and take your time on the debt- with some assumptions made, and more info needed for sure.

If goal is being financially secure, you need to look at "time" and much money you will spend or save over a given period of time.

For example, if you told me the $12,500 is going to take 10 years to pay off on current schedule (with making only current minimum payments) and the IRA is invested in CDs or bonds, there is an answer here to pay off debt...
However if you told me same 10 year payoff and IRA is invested in equities, then I say IRA all the way, maybe funnel a little towards the debt, but with higher return in IRA, keep the debt and keep contributing to IRA.

If you can pay off loan fast- think in 10 months, and then direct all original loan payments plus overpayments to investing, it might make sense to pay off the loan early.

There are lots of variables, you need to give us more information for a specific response. General information gets a general response (that is what you have so far).

Specific information will give a specific response.

Here is what you need to provide:
Income level/spending level (how much of gross income is taxed, and what is take home income)
Current retirement contributions
Current debt payments (1st/2nd mortgage and other debt)
monthly budget (overall monthly spending patterns)

savings- do you have an emergency fund? How much?

then
what are your financial and life goals- retirement- financial security and risk profile? Debt averse, really debt averse or extremely uncomfortable with debt?

answer those questions for much better responses from everyone

[bones72]

Wow, thanks jIM, that's an excellent reply to a question. Your thorough answer also points out that if I am asking such a general question, then obviously my own financial plan is general or unfocused. Which is true. I want to be financially secure asap. I also want to be out of debt asap. Retirement, hmmm, I don't know about that.