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]

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]

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]

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.