What to do with raise

[Lovesabargain]

I'm getting a raise in August- going from 75,000/ yr to 80,000/ yr. I currently am contributing towards a state pension plan with my employer. I have the option of contributing to a 401k with my employer(no match), in addition to the pension plan. Another option would be to aggressively pay down my student loans with the extra money--I owe 14,000.

I'm not eligible to contribute towards a Roth Ira otherwise I would do that. What would you do with the additional income? Pre-tax 401, or pay down student loan? Or another option?

Thanks.

[TBH]

Depends on your age, your current retirement and student loan balances, and whether you have a good emergency fund in place.

[Lovesabargain]

I'm behind on retirement savings--only about 90,000 saved+ pension. I have about 4months of expenses in a money market savings account, plus an additional 2K in my checking. I'm 38 y.o. The student loan is 14,000. No credit card debt.

[Petunia 100]

Are you paying your student loan down faster than scheduled? If not, do you have "fat" in your budget? What sort of rate are you paying?

How much (percentage-wise) are you contributing to retirement now?

Everyone with earned income is eligible to contribute to a Roth, some may just have to do it indirectly. Contribute to a traditional IRA and then convert (no longer any income restrictions to do a conversion). If you have deductible contributions sitting in traditional, Simple, or SEP IRAs, your conversion will be partially taxable.

[My English Castle]

And your emergency fund is fully funded? Then why not split it? Roth and student loans both?

[BMEPhDinCO]

I would send it straight to a RothIRA - you are eligible since you make less than the cut off (>$110k for singles). I would also try and find a bit more in the budget and get those loans paid off - in 2 years, when you are 40, it would be nice to be done with them ($7k per year or just over $500 per month).

[thesimplemoneyblog]

It probably wouldn't hurt to use the raise for several goals. Instead of throwing it all at one, you might try putting some toward the student loans, some towards your retirement 401(k), and some more toward your emergency fund as needed. It does sound like you would qualify for a Roth IRA, so not sure why you implied you cannot contribute to a Roth.

[Lovesabargain]

I filed married filing separately(long story), which is why I'm not eligible to contribute to the Roth. I had to recharacterize my contributions to a traditional Ira for 2012. I plan on doing the same for 2013. I didn't realize I could convert to traditional to a Roth. Currently I'm only contributing 350/month to the traditional Ira.

Other than the traditional and my required contributions(7%) to my employer sponsored pension, I'm not contributing anything else towards retirement.

Student loan interest is 6.8%. I could put more towards the note each month right now before the raise kicks in.

I have four months total worth of emergency funds which is okay IMO considering we are in very stable fields and have disability insurance.

[kv968]

I filed married filing separately(long story), which is why I'm not eligible to contribute to the Roth. I had to recharacterize my contributions to a traditional Ira for 2012. I plan on doing the same for 2013. I didn't realize I could convert to traditional to a Roth. Currently I'm only contributing 350/month to the traditional Ira.

You can make non-deductible contributions to your traditional IRA and then just roll those over to a Roth. The only taxes you would have to pay are on whatever gains you made between the time you made the contribution and when you roll it over which would be minimal if you did it quickly.

Form 8606 Non Deductible IRAs

[Petunia 100]

You can make non-deductible contributions to your traditional IRA and then just roll those over to a Roth. The only taxes you would have to pay are on whatever gains you made between the time you made the contribution and when you roll it over which would be minimal if you did it quickly.

Form 8606 Non Deductible IRAs

She has an existing traditional IRA. So if she has deducted those contributions, then she must convert a proportionate share of deductible/non-deductible.

It is still worth doing, IMO.

[Manthony]

Pay down the student loan.

[Gailete]

Have you calculated the tax and SS effect on that extra $5000? I remember getting a sign on bonus of $1500 years ago. When is showed up in my paycheck it had dissolved into around $800 because of the deductions. Your raise shouldn't come as one big bunch, so if get that $5000 raise, it is only $416 a month before deductions and depending on your tax situation you might only see around $200 of it.

Sounds like you should be adding to your retirement and I would (personally) be paying off that student loan and get rid of it. I see how my son's student loans are bugging him, I'd want them paid off at well! So you could split what you do with the money. Is anything else in your budget tight? This doesn't sound like the kinds of raise to get extravagant with.

Funny thing my first salaried job paid me $5000 a year! I think I've gotten too old!

[Lovesabargain]

Thanks for replying everyone.

I considered that I would only see maybe a $250/month increase in my paycheck which is why I initially thought It would be more beneficial to make pre-tax contributions to my employer sponsored 401k.

[Gailete]

I would go with half to retirement and half to pay off those loans sooner.

[kv968]

She has an existing traditional IRA. So if she has deducted those contributions, then she must convert a proportionate share of deductible/non-deductible.

It is still worth doing, IMO.

True, good point. However she's only been doing it for a year so the taxes shouldn't be that bad (depending on how much she put in). So like you said, it'll probably still be worth doing.

I was just trying to tell her to not put the 2013 money in a traditional as deductible if she was going to go that route and wanted to convert to a Roth.