topic Re: 401k vs pay down debt in Personal Finance

401k vs pay down debt

seanf12 — Thu, 25 Jan 2024 21:43:08 GMT

I am currently maxing out my 401k contribution at the full, annual amount of $22,500, while also following the debt snowball method, for which I am on track to have all non-mortgage debt paid off in 20 months (while still maxing out my 401k). I was considering decreasing my 401k contributions to the same level of my employer match, and instead take those funds and put them towards the debt. If I pay those extra funds towards my debt instead of 401k, I would have all of my non-mortgage debt paid off in 15 months instead of 20. Of course, I would lose the tax advantages. What are your thoughts, is it worth getting the debt paid off 5 months faster, or should I continue with my current strategy of maxing out my 401k while still following the debt snowball and getting things paid off in 20 months? Thanks!

Re: 401k vs pay down debt

pizzadude — Thu, 25 Jan 2024 22:12:28 GMT

@seanf12 wrote:
I am currently maxing out my 401k contribution at the full, annual amount of $22,500, while also following the debt snowball method, for which I am on track to have all non-mortgage debt paid off in 20 months (while still maxing out my 401k). I was considering decreasing my 401k contributions to the same level of my employer match, and instead take those funds and put them towards the debt. If I pay those extra funds towards my debt instead of 401k, I would have all of my non-mortgage debt paid off in 15 months instead of 20. Of course, I would lose the tax advantages. What are your thoughts, is it worth getting the debt paid off 5 months faster, or should I continue with my current strategy of maxing out my 401k while still following the debt snowball and getting things paid off in 20 months? Thanks!

Have you run the numbers on how much interest you'd save by paying 5 months faster ? Unless it's a significant amount, I'd be inclined to keep saving in your 401K. In my own experience, it's hard to restart savings once you stop automatically contributing.

Re: 401k vs pay down debt

seanf12 — Thu, 25 Jan 2024 22:52:52 GMT

@pizzadude Good call out. So I would be saving around $2800 in total interest if I paid it all five months faster. And you're 100% right, I'm more than used to the automatic contribution and turn it off and I wonder how hard it would be to turn it back on.

Re: 401k vs pay down debt

markbeiser — Thu, 25 Jan 2024 22:55:58 GMT

If the 401k has enough in it, consider taking out a 401k loan to pay off the debt, then pay off the loan while continuing to contribute to the 401k.
You would be paying it back with post tax funds, but the interest you pay on it goes back into the 401k.

Re: 401k vs pay down debt

PNWRambler — Thu, 25 Jan 2024 23:30:28 GMT

Interest rates and 401k match are factors as well. 5 months is significant over a range of 15-20 months. If you have a match, I might reduce my 401k down to the match only vs maxing it out to pay off a little faster, but personally I wouldn't completely stop it and miss out on the match.

Re: 401k vs pay down debt

CorpCrMgr1 — Fri, 26 Jan 2024 02:37:53 GMT

The old saying is pay yourself first. A good percentage of people that borrow on the 401k or any savings don't pay it back.

Re: 401k vs pay down debt

ptatohed — Wed, 14 Feb 2024 07:08:31 GMT

If you switch to avalanche you'll reduce the amount of interest you pay and the time it takes to pay off the debt. If your debt has notably high interest rates, I would consider dropping your contributions down to the match but be diligent about returning it to max contribution after you pay off your debt. Good luck.

Re: 401k vs pay down debt

TriniQueen1 — Thu, 15 Feb 2024 00:16:07 GMT

Hello

I personally agree. I have similarly utilized "401K funding" to payoff debt and used some as a down payment on a home purchase. Even with the employer match, please consider the growth (5-7%) that your money could be earning vs the interest (20-30%) you are paying on the debt. I felt the pinch with the aggressive 401k savings and loan payoff, yet I gained tremendously more than what the 401k yielded!

For example, I used $20k for the home downpayment which in just 3 years, the equity gained is $180k, and now I NEVER keep a balance after the closing statement dates on my credit cards; always ) interest. I save my Cashback bucks from (1 - 5%) on my credit cards as a savings as well to help stay out of debt. Tough at first but it has become "second nature" and feels great keeping my utilization quite low.

Re: 401k vs pay down debt

Citylights18 — Thu, 15 Feb 2024 01:10:51 GMT

I would just go with 401k up to the employer match. You can always contribute more by Decembrer 31st if you have the funds.

Re: 401k vs pay down debt

SouthJamaica — Thu, 15 Feb 2024 02:05:19 GMT

@seanf12 wrote:
I am currently maxing out my 401k contribution at the full, annual amount of $22,500, while also following the debt snowball method, for which I am on track to have all non-mortgage debt paid off in 20 months (while still maxing out my 401k). I was considering decreasing my 401k contributions to the same level of my employer match, and instead take those funds and put them towards the debt. If I pay those extra funds towards my debt instead of 401k, I would have all of my non-mortgage debt paid off in 15 months instead of 20. Of course, I would lose the tax advantages. What are your thoughts, is it worth getting the debt paid off 5 months faster, or should I continue with my current strategy of maxing out my 401k while still following the debt snowball and getting things paid off in 20 months? Thanks!

I'm probably in a minority but I think it's a good idea to concentrate on paying down the debt.

Re: 401k vs pay down debt

ForwardLooking — Fri, 16 Feb 2024 17:17:03 GMT

@SouthJamaica wrote:
@seanf12 wrote:
I am currently maxing out my 401k contribution at the full, annual amount of $22,500, while also following the debt snowball method, for which I am on track to have all non-mortgage debt paid off in 20 months (while still maxing out my 401k). I was considering decreasing my 401k contributions to the same level of my employer match, and instead take those funds and put them towards the debt. If I pay those extra funds towards my debt instead of 401k, I would have all of my non-mortgage debt paid off in 15 months instead of 20. Of course, I would lose the tax advantages. What are your thoughts, is it worth getting the debt paid off 5 months faster, or should I continue with my current strategy of maxing out my 401k while still following the debt snowball and getting things paid off in 20 months? Thanks!
I'm probably in a minority but I think it's a good idea to concentrate on paying down the debt.

I am in your camp. I would much rather pay off the debt first and use that extra cash flow later to build up the 401k. But this only works if you are truly commited to becoming mostly debt free, especially with credit card and consumer finance debt.

Re: 401k vs pay down debt

ptatohed — Fri, 16 Feb 2024 18:16:22 GMT

I agree paying down doubt is likely more important than saving (provided you have at least a sufficient minimum savings). But, in my opinion, it should be distinguished that 'high interest' debt should be paid first, not necessarily low interest debt. I only have two loans right now. My wife's car loan at 1.99% and our mortgage at 2.65%. When savings rates were low, we would toss extra money at these loans. Now that savings rates are 5%ish, we have stopped and pay only the monthly amount due, keeping the extra money in savings. My general thought is, pay off debt that is higher than any investments you can get.

Re: 401k vs pay down debt

Kforce — Fri, 16 Feb 2024 18:22:05 GMT

"I was considering decreasing my 401k contributions to the same level of my employer match, and instead take those funds and put them towards the debt."

^^^ This

Re: 401k vs pay down debt

CorpCrMgr1 — Fri, 16 Feb 2024 19:19:34 GMT

@Kforce wrote:
"I was considering decreasing my 401k contributions to the same level of my employer match, and instead take those funds and put them towards the debt."

^^^ This

Great idea!

Re: 401k vs pay down debt

Dougherty — Sun, 18 Feb 2024 03:06:19 GMT

The value of a 401k is in not paying taxes on gains. Let's generously assume you could earn 10% in a year on money invested in something, e.g. stocks, in your 401k. After a year you sell the stocks. If the money wasn't in your 401k, you would have to pay up to 2% in long term capital gains, leaving a gain of only 8%. Do this for another year and the 401k is ahead by 4% vs a traditional account, after 3 years it's ahead by 6%, etc.

If your credit card debt is at 25% APR and you're paying off about 9 months early by taking from your 401k, you're saving 18% in interest.

So the most important question is how long it will be before you use that 401k money. If less than 9 years (e.g. if you're over 55), absolutely pay off the credit card debt. In fact, you only get taxed when you sell your investment, so the difference between 401k and traditional is less than 2% per year. If you only change your investment every 5 years then it will be 45 years before the difference grows to 18%.

Re: 401k vs pay down debt

KatzNDawgs — Sun, 18 Feb 2024 03:31:00 GMT

I would only contribute enough to get the max employer match, then stop there. For long-term retirement planning, you will be taxed a bunch when you take out, the employer match is the only good reason to contribute. Use leftover to pay off current bills, when those are payed off, go for a Roth IRA so you won't get taxed on withdrawal after growth. Depending on company plan, I would also consider in the future taking the IRA to a back-door Roth IRA not to exceed your tax bracket yearly to let long-term growth be tax-free.

Re: 401k vs pay down debt

Dougherty — Mon, 19 Feb 2024 08:27:00 GMT

Actually the number doesn't change much if you change your investment every 5 years. So I would say if you're under 55 you should max out the 401k probably.

Re: 401k vs pay down debt

clipperskipper — Tue, 20 Feb 2024 22:04:49 GMT

What are you carrying paper on, and what are the interest rates?