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Debt vs Self Employed 401k

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  • Debt vs Self Employed 401k

    if you don't have a company matching 401k (self employed so I am the company) is it better to pay off any debt before contributing to the retirement plan?

    for instance if you owe money on a car or home line of credit should you pay these off before contributing to the individual 401k?

  • #2
    Other's will probably have more insightful advice, but I'd say it depends on rates. If the rates are less than 5%, definitely contribute towards the 401K. However, if it were unsecured debt like personal loans and credit cards where the rates are 15%, then paying that stuff off would be priority #1.
    Youtube Channel: https://www.youtube.com/channel/UCbV...5W56pRkf4EM6XA

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    • #3
      Originally posted by mwhittington View Post
      if you don't have a company matching 401k (self employed so I am the company) is it better to pay off any debt before contributing to the retirement plan?

      for instance if you owe money on a car or home line of credit should you pay these off before contributing to the individual 401k?

      Well think of it this way; if you were employed by someone else, would you be waiting year after to year before your house was paid off, your car paid off, etc. before contributing to the company 401K? Most everyone here would tell you that you are nuts if you do. You contribute now and let that money have a chance to percolate for a few decades.

      Granted it is difficult when self-employed to pull retirement money savings out of what is coming in, but you should strive for at least 10% to long term retirement savings. You can save and make investments through Capitol One 360 which is what we use. We can't make deposits in the amount that the law allows as that would be a huge amount of our income, but I do try to set aside 15% into savings from my business every month. I was checking our accounts today and was pleased to see how well they are doing considering what a struggle it has been to save and not take a penny out of those accounts.

      If you do your taxes yourself with tax software, they used to have them set up so you can run scenarios of if you put so much in a retirement funds. I haven't seen that set up in awhile, but you can still do it by opening your file and copying it so you can make changes to see what it would do to your taxes if you invested so much in an IRA/401K, or as you are self employed the different amounts that you are entitled to. This will help you see how much it might 'cost' you to save a particular amount.

      For sure you need to be saving for your retirement. At least in my opinion.
      Gailete
      http://www.MoonwishesSewingandCrafts.com

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      • #4
        every situation is different..

        - do you find yourself making a lot of money that you want to stash away in tax deductible account?

        that's the primary reason for using a solo 401k.. otherwise if the contribution is not a lot and won't save you much in taxes, you might want to research other options..

        As a self employed individual, your solutions are not the same as 9 to 5 employees. i'm not a fan of illiquid assets (like a 401k) for self employed folks especially if you can get better returns by reinvesting in your business. As a self employed individual, it's important to have cash for opportunities that will arise and cash for the tough times ...

        ..but again it depends on your situation.. you might want to vet some financial advisors who specialize with small business individuals.. but do your homework... it's not easy to find a good one.

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