Saving vs Paying of loan - topic that's been repeated many times...

[Dixiechick]

I have a situation...

I'd like to start a Roth IRA - I've maxed out my 401(k) at 15% per paycheck but I want to save more. I also have an unsecured loan ($15k) at 8.99% for another 5 years or so. The Roth IRA I'm looking at will be a mutual fund that has been averaging 10-11% (that's the lifetime average over the past 10 years). Should I start saving into this IRA ($200/mo) or pay $200/mo more on the unsecured loan? Also realizing that the Roth IRA gains will be tax free...and that I'm 40 - another 19.5 years before I can begin withdrawing the retirement money...

Someone want to do the math for me here? Where will my dollars work the best for me? I don't have my calculators needed to crunch through these numbers...

Thanks in advance!

Dixie

[jIM_Ohio]

I'd drop the 401k down to around 10%, put 4k into the Roth, and pay off the loan (how much is 5% of 401k contribution?)

[Dixiechick]

(how much is 5% of 401k contribution?)

5% for me is $4600 - does also factor into my tax withholding. I'm also close to the AMT situation and want to keep the 15% on my 401(k).

I'm thinking I'll either split the 200/mo between the loan and Roth IRA or scrap up some more and fund them both equal amounts to 200 each - I'll play with the numbers. I have a daughter in college that I'm supporting also and a 10yr old son as well...

Dixie

[jIM_Ohio]

5% for me is $4600 - does also factor into my tax withholding. I'm also close to the AMT situation and want to keep the 15% on my 401(k).

I'm thinking I'll either split the 200/mo between the loan and Roth IRA or scrap up some more and fund them both equal amounts to 200 each - I'll play with the numbers. I have a daughter in college that I'm supporting also and a 10yr old son as well...

Dixie

so you make close to 92k... exactly where is AMT hitting you if you go down to 10%?

Considering the tax bracket you are in, and the earning power you have, getting more money into Roth type accounts will be to your advantage.

I agree avoiding AMT should be done if possible, what about your taxes/income/work triggers this?

[Dixiechick]

so you make close to 92k... exactly where is AMT hitting you if you go down to 10%?

Considering the tax bracket you are in, and the earning power you have, getting more money into Roth type accounts will be to your advantage.

I agree avoiding AMT should be done if possible, what about your taxes/income/work triggers this?

I forgot to mention I have rental properties and they are showing positive cashflow on paper. I'm looking at doing some tax exchanges on them sometime soon...

I think instead of saving the rental income for repairs (which I have enough to cover them all for a while), I'm going to through that extra money onto my debt. That should work fine for a while at least...

Thanks!

Dixie

[jIM_Ohio]

Your initial question suggest a certain line of responses (minimize some retirement contributions to pay off debt).

As the picture gets bigger, I would think

a) contact an accountant familiar with taxes and small businesses
b) avoid AMT
c) leverage "more" with better debt.

c) means transfer the consumer debt/ bad debt into a 2nd mortgage on a property, possibly holding the property within an LLC or something. Reason for this is the small business might lend itself to more tax deductions/ retirement funding options not even in discussion now. You can contribute more to a SIMPLE IRA than a 401k, I think. More deductions, but you need an accountant to help with this.

[Hot dog]

Here is a question I am just learning about this stuff but if you take out a HELOC or a 2nd mortgage on one of the rentals isn't this a good way to take away the positive cash flow and lower the 8.99 interest you are paying while also making it tax deductible?

[Scanner]

Jim is correct on the small business front and consulting with an accountant.

As much as I am an amateur businessman and investor, my accountant was able to earn his keep this year when we topped six figures (remember last year I was questionable on his keep - not this year, LOL!).

My wife hasn't always recognized this but having a small business does allow you a certain amount of discretion that employees don't have with Uncle Sam. We've just had a business so long she just figures we have a take-home like anyone else.

That doesn't mean writing off trips to Disney World as educational expenses but it does mean sometimes things that you consume can be justified as business. So, punting this to an accountant may not be a bad idea.

Anyway, more to your specific question - I am being repetitive but I look at paying down debt as the conservative part of your portfolio.

If you are aggressively deployed elsewhere, it may not be a bad idea to retire some debt.

Another way to look at it too is in terms of risk and reward - how much risk did you assume with the rental properties? If it was a lot of risk, one way of looking at it is you must now balance that with something conservative, like paying down debt.

That is, you went out and risked your hide to get the money, now. . .you don't risk your hide to keep the money.

All in all, you have to form a philosophy, no one particular philosophy and adhere to it.