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Have I reached "capitulation" for considering this?
Old 01-16-2009, 04:23 PM   #1
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Have I reached "capitulation" for considering this?

I'm 34 and have been maxing out my 401(k) and my (and my wife's) IRA contributions pretty much since I started working 12 years ago. It's almost religion to me.

I'm still maxing out my 401(k), but this year is the first year the market has me so ... unenthused ... that I'm seriously considering forgoing the IRA contributions this year and instead using that money to do something that I've been considering for a while: paying off a student loan at 5.075% interest.

I know retirement savings is very important, especially in these tax-favored plans. But a guaranteed return of 5.075% is very tempting right now. (Further dampening my enthusiasm for my IRA is that I am not eligible for a Roth IRA or a deductible IRA, so it was only going to be a non-deductible IRA contribution.) I don't qualify for any deduction of the student loan interest.

What do you guys think? If you had to choose between:
- non-deductible IRA contribution
- paying off a 5.075% student loan

Which would you chose and why?
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Old 01-16-2009, 04:38 PM   #2
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Well it's almost like trying to decide between a 5% cd or taking your chances in the market. I like paying off debt so I would probably go that route.
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Old 01-16-2009, 04:43 PM   #3
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I'd put it in my retirement account. If you don't add your yearly contribution by the deadline, you can't go back and add it later when you have more money. You can pay off your student loan whenever you want.

Besides, this is (probably) one of those opportunities to buy low.
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Old 01-16-2009, 04:44 PM   #4
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Personally, I think non-deductable IRAs are not a particularly attractive saving vehicles. Given the current tax laws, I'm not sure you don't come out ahead in non-deductable IRA vs sticking the money in index fund with very low distributions and not touching the money for 25-30 years.

A 5.075% risk and tax free return is certainly very attractive. Never the less I think you'll make more money in the market in the next 20+ year. However, if you'll sleep better at night I see absolutely nothing wrong with paying off the student loan.

This is one of those decision where there is no obvious right or wrong answers financially. I'd even go so far to say that some one that claims that X is absolutely better than Y shouldn't be trusted. So it comes down to an psychological decision are you more fearful or more greedy.
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Old 01-16-2009, 04:52 PM   #5
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This is a Dave Ramsey type question -- not that he's perfect IMHO. I'll revise his normal answers to my own prejudices.
  1. Get an emergency fund of 3 to 6 months of living expenses.
  2. Put enough into your 401k to get any company match.
  3. Pay off all non-mortgage debt.
  4. Max out 401k or IRA - use your judgement on whether to use the Roth versions of either.
  5. Get your emergency funds up to one year of living expenses.
From what I see you're at step 3.
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Old 01-16-2009, 05:14 PM   #6
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Dawg - interesting comment. I would not be tempted to put my money in a CD earning 5.075% instead of putting it into my (mostly stock) retirement investment stash, yet I'm tempted to pay off a loan at 5.075% instead of investing in the retirement account. Funny how that works!

Want2Retire - yeah, the "add to the IRA for 2008 or lose the chance forever" is the main thing that keeps me in doubt. I feel like in 30 years I will look back and wish I would have dumped more money into the market. But then again, will I notice this little bit? Or am I starting down a slippery slope to skipping IRA contributions? :-)

clifp - I'm probably equal parts fear and greed, which may be a good thing but sure does make for some agonizing decisions! Like you, I'm not sure how much benefit a non-deductible IRA is really going to give me over regular long-term investment in a taxable account.

2B - yeah, I'm maxing out my 401(k) but otherwise I'm at step 3. I wonder if Ramsey has ever considered student loan debt, or whether he just lumps everything into mortgage v. non-mortgage debt. While I don't qualify for deducting the interest on my student loans, there is still some minor benefit to student loans in that I think you can get a deferral on making payments if you experience qualifying economic hardship. Not that I plan on having to invoke that, but it's one thing that makes those loans less scary than some other non-mortgage debt like credit cards etc.

In any case, thanks for the replies all - your perspectives have given me more to think about. Good thing I have some time before April 15th.

Edited to add: another factor at work is probably the instant gratification that comes with paying off that student loan, i.e. reducing my monthly expenses by $100 every month. The non-deductible IRA is purely delayed gratification ...
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Old 01-16-2009, 05:16 PM   #7
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Originally Posted by Lusitan View Post
I'm 34 and have been maxing out my 401(k) and my (and my wife's) IRA contributions pretty much since I started working 12 years ago. It's almost religion to me.

I'm still maxing out my 401(k), but this year is the first year the market has me so ... unenthused ... that I'm seriously considering forgoing the IRA contributions this year and instead using that money to do something that I've been considering for a while: paying off a student loan at 5.075% interest.

I know retirement savings is very important, especially in these tax-favored plans. But a guaranteed return of 5.075% is very tempting right now. (Further dampening my enthusiasm for my IRA is that I am not eligible for a Roth IRA or a deductible IRA, so it was only going to be a non-deductible IRA contribution.) I don't qualify for any deduction of the student loan interest.

What do you guys think? If you had to choose between:
- non-deductible IRA contribution
- paying off a 5.075% student loan

Which would you chose and why?
If your income is too high to qualify for a ROTH IRA then i'd think you'd have enough money to max out your 401K and still pay a lot extra toward your student loans. I'd max tax deferred accounts then pay off debt then non tax deferred accounts only after debt is gone.
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Old 01-16-2009, 05:27 PM   #8
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If your income is too high to qualify for a ROTH IRA then i'd think you'd have enough money to max out your 401K and still pay a lot extra toward your student loans. I'd max tax deferred accounts then pay off debt then non tax deferred accounts only after debt is gone.
Aaron - that's true. I am simultaneously trying to meet several goals (increase emergency fund, save for down payment ... plus I live in a high-cost area) but it's like a game of musical chairs, and the last two goals left standing when the music stops (i.e., when I run out of money to invest) are (1) paying off the student loan and (2) putting it in the IRA, so that's why I'm trying to decide between those two.
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Old 01-16-2009, 05:35 PM   #9
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Pay off the loan. Life is better when you don't have debt hanging over you.
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Old 01-16-2009, 05:46 PM   #10
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Pay off the loan. Life is better when you don't have debt hanging over you.
I hear you, Trek. I would very much like to get to "debt free".

A student loan at 5.075% isn't that bad, but boy the interest rate seems high now when I look at the measly rate I'm getting on my emergency-fund CDs and savings accounts.
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Old 01-16-2009, 06:28 PM   #11
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I hear you, Trek. I would very much like to get to "debt free".

A student loan at 5.075% isn't that bad, but boy the interest rate seems high now when I look at the measly rate I'm getting on my emergency-fund CDs and savings accounts.
When I was in college(long ago), interest rates on student loans were 3%. I didn't pay that off early. Paid it off according to the payment schedule of 10 years.
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Old 01-16-2009, 06:36 PM   #12
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Pay off the loan. Life is better when you don't have debt hanging over you.
I agree with this. Not to say it is the correct way of thinking. You can't go wrong either way. Just don't spend it on a down payment on a yacht or Porsche
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Old 01-16-2009, 08:07 PM   #13
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A student loan at 5.075% isn't that bad, but boy the interest rate seems high now when I look at the measly rate I'm getting on my emergency-fund CDs and savings accounts.
An after-tax return of 5.075% guaranteed is very tempting. Personally, I would pay down the loan.
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Old 01-16-2009, 08:55 PM   #14
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Pay off the loan. Life is better when you don't have debt hanging over you.
My student loan which is locked at 1% and change will get paid off at the slowest pace possible while still technically staying current.
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Old 01-16-2009, 09:02 PM   #15
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About 2 years ago I sold a boat-load of Citigroup stock at right around $50 / share and used the money to repay my 5.25% mortgage. At the time many people said that was a stupid trade. Citi was paying a ~4% dividend yield, after all. Well 24 months forward, my mortgage is repaid and I've saved 5 figures in interest. Meanwhile Citi is trading at ~$4 per share and they've cut the dividend to just $0.04 annually. That was one of the best trades I ever made.

Sometimes a sure thing is a sure thing. Nothing wrong with being happy with a bird in the hand.
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Old 01-16-2009, 09:16 PM   #16
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I think the OP needs to do an after tax analysis - contribute to 401K & pay off the student loan Vs no 401K contribution and pay off student loan.

My guess is that it is better to contribute to the 401K

TurboTax® Tax Estimator Tool - Free Tax Software Tool to Estimate Your Taxes
Assume Gross $80K with 10% 401K contribution & 5% company match

7300 Taxes with contribution - plus company match of $4,000 net 3,300 outflow
8500 Taxes without contribution - no company match 8,500 net outflow
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Old 01-16-2009, 09:46 PM   #17
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I think the OP needs to do an after tax analysis - contribute to 401K & pay off the student loan Vs no 401K contribution and pay off student loan.

My guess is that it is better to contribute to the 401K

TurboTax® Tax Estimator Tool - Free Tax Software Tool to Estimate Your Taxes
Assume Gross $80K with 10% 401K contribution & 5% company match

7300 Taxes with contribution - plus company match of $4,000 net 3,300 outflow
8500 Taxes without contribution - no company match 8,500 net outflow
That's not his choice/dilemma. The question is whether to pay off the SL or contribute to non-ded IRA. He's still maxing the 401K.
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Old 01-16-2009, 09:50 PM   #18
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I think crunching the numbers as they are would probably argue for paying down the student loan. The only wildcards:
-- The government is getting ready to throw around a lot of bailout money, and I wouldn't be surprised if some of it is shoveled toward holders of student loans. This would probably be income-based, and you'd likely not qualify, but stranger things have happened.
-- Inflation: If you believe that the big amounts of money Uncle Sam will be printing to pay off this money-fest will lead to inflation, then you want to be a holder of low-interest debt. It would feel pretty good to have 5% student loans when inflation is 10% per year.
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Old 01-16-2009, 10:05 PM   #19
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That's not his choice/dilemma. The question is whether to pay off the SL or contribute to non-ded IRA. He's still maxing the 401K.
Thanks - I'd pay off the student loans but I'd try to still make contributions to the non-ded IRA
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Old 01-16-2009, 10:05 PM   #20
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...could lead to inflation. No sign of it yet. I'd bet on some deflation before the inflation comes, what with 50% off everything in so many stores, gas prices at their lowest in years, etc. I would bet the next cpi reports will show slowing or reversal of last year's inflation.

I'm all for paying off the debt, since you can't do a roth or a deductable ira. I hate debt, personally. Better to earn interest than pay it. Next would be the mortgage, if you have one. Refi to a lower rate as they come down, and pay that down as well while building your taxable account.

I would stay away from IRAs that are non-deductable...no benefit there. Anythin leftover? Fund a taxable account, targeted for retirement, but that gives you more flexibility, if you need it, and would be the place to draw from first if you retire before 59.5.

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