401K vs Roth IRA

[FoolFromAZ]

I have not posted for very long time. Current update on my situation is 273K on mortgage (first and HELOC combined), 3.5k left on my car loan, still 52K on CC (mine and wife). nearly 15K on 0% apr, rest spread from 5% to 10% apr. We have around (32+25+2+1=60)K saved in 401K and roth IRA. My wife recently delivered our second daughter, stopped working since then, she does not have plans to work for another yr or so. So I will be only BWinner. I make around 98K per yr.

Here my question is I am currently sending 17% of my salary to 401K, I get only 6% of that as match from my employer. Whatever the net income that I get, I used that to pay all the bills and whatever the remaining, I am putting that in to car loan. In the last two years, I have only put $500 in Roth IRA. Should I reduce my 401K contridbution to 6% and put $500 per month into Roth IRA? My friends have been suggesting me to do so. Is that a right idea? if so, why is that a right idea and what are the advantages of that. Thanks so much for your time.

FFA

[bjl584]

I'm thinking reducing the 401K to 6% and then use the remaining cash to get rid of that CC debt. You have almost as much Credit card debt as you have retirement savings. I would hold off on the Roth until you can get the CC debt to a more manageable level.

[FoolFromAZ]

I'm thinking reducing the 401K to 6% and then use the remaining cash to get rid of that CC debt. You have almost as much Credit card debt as you have retirement savings. I would hold off on the Roth until you can get the CC debt to a more manageable level.

I thought of paying off Car loan first which frees up 360$ and then put that in one of the higher Interest credit card.

[jpg7n16]

I'm with Brian on this one.

Your plan as is: What you are hoping to do is invest the money for your retirement, and are probably planning on earning somewhere between 7-11%. Which through compounding could help you retire with a bunch of money. In the Roth, this money won't be taxed if you withdraw after age 59 1/2.

What you're missing: your credit cards are charging you between 5-10%. And interest compounds on your debt too - meaning that just like compounding benefits you in the Roth account, it compounds to harm you on debt. You don't get taxed on this savings no matter how old you are, so it's like a tax-free risk-free return of 5-10%


I would take the match, cause it's free. No more, no less. And I wouldn't put a dime into Roth accounts until you are free of any interest that charges more than 7%. Why should you take risk and hope for 7-11%, when you could pay off the debt and save over 7% guaranteed??



Though someone has to ask the question - your income is $98k, and your wife used to have income too - so how did you guys get to the point of having over $50k in CC debt?? Are you on a budget these days?

[jpg7n16]

I thought of paying off Car loan first which frees up 360$ and then put that in one of the higher Interest credit card.

If your car interest rate is lower than the credit card, you are just hurrying to pay off the cheap debt while postponing some of the expensive debt.

If you have $3.5k cash and your ultimate goal is to get rid of the high interest, why pay off the cheap stuff first? It would take 9.7 months of paying $360 just to match the one time payment of $3.5k.

[FoolFromAZ]

reason why I am reluctant to go after cc aggressively and would like to put as much as possible in retirement is, I dont have Emergency Fund. If I have paid down cc debt, these days cc companies are reducing the available credit as soon as I paydown any CC. Thats why I have been paying minimum payment on CC. If I payoff the car loan, a) I have $360 which I pay either towards CC or save it everymonth. b) If needed, I can refinance the car again and use that money for emergency.

If I have more money in 401k or roth IRA, I can either get loan from 401k or withdraw some from roth whenever I have emergency situation happen. That is the reason for maxing out my 401k for the past yr or so instead of paying down the cc aggressively.

[FoolFromAZ]

Though someone has to ask the question - your income is $98k, and your wife used to have income too - so how did you guys get to the point of having over $50k in CC debt?? Are you on a budget these days?

due to bad money management. I bought my home without having much in the checking or savings account, hence bought all furnitures through CC, withdrew some during the time we were jobless for few months, also took nearly 12K from CC and paid down my HELOC, took nearly 10K from cc and played in stock market. everything happened before 2008 time. Since 2008, we have been doing it properly, hence our net worth which was -400K one time to less than -280K now.

[jpg7n16]

reason why I am reluctant to go after cc aggressively and would like to put as much as possible in retirement is, I dont have Emergency Fund. If I have paid down cc debt, these days cc companies are reducing the available credit as soon as I paydown any CC. Thats why I have been paying minimum payment on CC. If I payoff the car loan, a) I have $360 which I pay either towards CC or save it everymonth. b) If needed, I can refinance the car again and use that money for emergency.

Okay that makes sense, the car is only 6% of the total debt (non house), so if the extra cash each month would give you peace of mind, I think that's okay. Though you should be aware you are costing yourself a couple hundred a year in interest to do it. (10% on CC - 5% estimated car loan rate = 5% extra * 3500 = $175/year)

You should also be aware that if you follow Brian's plan and cut the 401k back to 6%, you'll have around an extra $675/month after taxes to use for available cash and debt repayments. (98k * 11% = 10,780/12 = 898.33 * .75 taxes = 673.75/month)

You could do some serious damage to this debt with the $675/month, and it could provide a good head start towards a cash buffer.

If I have more money in 401k or roth IRA, I can either get loan from 401k or withdraw some from roth whenever I have emergency situation happen. That is the reason for maxing out my 401k for the past yr or so instead of paying down the cc aggressively.

I'm one of the ones on here that feels that retirement accounts should be used for retirement, and only for retirement. So I don't care much for the EF in a Roth account idea.

I'd much rather see you build up $3-5k in cash, then start attacking this debt. You need some cushion, but you don't need a full EF yet.

-------------------------------------------------------------------------

As an aside, if you're comfortable posting your budget, there are some great minds here who can help you trim down where possible, to free up more cash each month. Use that cash to build you EF, pay down debt, whatever you want.

due to bad money management. I bought my home without having much in the checking or savings account, hence bought all furnitures through CC, withdrew some during the time we were jobless for few months, also took nearly 12K from CC and paid down my HELOC, took nearly 10K from cc and played in stock market. everything happened before 2008 time. Since 2008, we have been doing it properly, hence our net worth which was -400K one time to less than -280K now.

Wow. Good work on raising your net worth $120k That's fantastic! And still rising!!