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Pay off low rate refinanced loans or taxable IRA?

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  • Thedoc2049
    replied
    Great advice ... very good point/correction on putting the money in a brokerage account rather than IRA

    Leave a comment:


  • hightower
    replied




    Hi,

    I am attending making good income. I have 72,000 student loan debt refinanced at 2.95%. No other debt.

    Question is should I pay off my debt as quickly as possible? Or should I be investing extra income into taxable investment account? 529 for kids?

    I already plan to max out the employer 401k and Roth IRA. Question is what to do with left over income – pay off loans quickly or taxable investment account? My hesitation in paying off the debt quickly is the rate is currently low and may be advantageous to keep this relatively cheap debt around longer.

    Thanks for your advice.
    Click to expand...


    I'm in a similar boat as you except I don't have as much cash on hand and I already own a home so I don't have to worry about saving for a down payment, but I have 101k of student loans left at 2.6% fixed for like 23 years (payment is only 488/month).  I am working a lot of extra shifts right now earning good money (and fairly easy) and I expect to easily have enough to pay this balance off in 6-7 months.  I'm still kind of torn about whether I should pay it all off over the next 6-7 months or stick it all in my taxable account and let it start growing.  Some days I want to be done with it and be able to say I'm "debt free except the mortgage" and other days I think I'd be just fine with knowing I have more than enough in my taxable account to pay it off any time I want.  The more I go over each scenario the more I realize that in the long run it probably won't make much difference.  Paying it off in 6 months means I save 30k in interest over the life of the loan.  But, I lose approximately 1 year of interest earning potential if I were to invest it instead (6-7 months to pay it off and another 6-7 months to save up 100k again).  That one year of lost growth probably won't matter all that much, but might negate the money saved in paying off the loans early.  It's impossible to accurately predict which scenario will cost me more...paying off the loan slowly and paying 30k in interest costs or paying off the loan quickly and losing a year of investment growth.  Either way, the loan is going to cost me money in interest. One kicker for my scenario is that I don't know how much longer this easy money will be available to me, so I kind of feel like holding on to it because it might come harder in the future.

    I agree with WCI that it probably doesn't matter much other than you need to decide when you want to be out of debt.  It's kind of a personal choice I guess.

    But, if I had as much cash on hand as you already have, I'd just get rid of the 72k student debt and be done with it.  You don't need to put 200k down on a house as Zaphod mentioned.  You're fortunate because you can pay it off now and start investing immediately.  You'll forget about this whole conversation in no time.

    **Also, don't put the money in a traditional IRA (as your title suggests) because then you can't do a back door ROTH each year.  Put the money in a brokerage account (there's a difference and it does matter).

    Leave a comment:


  • MochaDoc
    replied




    If you’re talking about the annual gift limit, it’s been $14,000 per year since 2014. Also, your spouse can give another $14K per year, so it’s $28K per year.
    Click to expand...


    They're discussing annual max for a 529 plan.


    26k per year – 13k for each parent for one 529 for one child
    Click to expand...


    I thought the max was state dependent?

    Leave a comment:


  • Hank
    replied
    If you’re talking about the annual gift limit, it’s been $14,000 per year since 2014. Also, your spouse can give another $14K per year, so it’s $28K per year.

    Leave a comment:


  • Thedoc2049
    replied
    26k per year - 13k for each parent for one 529 for one child

    Leave a comment:


  • FIREshrink
    replied
    What does it mean to max out a 529?

    Leave a comment:


  • The White Coat Investor
    replied




    Right now have about 90k in cash and expecting to receive a bonus this year of around 130k, which will net out to 65k after taxes. Wife and I have about 200k for a down payment on a house already. I’m 33 and she is 32. One child who is 19 months old.

    So question is after maxing our 401k and 529, should the remainder of money be put into taxable investment account, keep as cash or pay down/off the debt?

    Thanks for the advice.
    Click to expand...


    None of that information really changes my thoughts. When do you want to be out of student loan debt? That's the main question you need to answer.

    What I would probably do is take $72K of that $90K in cash you have and send it to the lender on Monday.

    Leave a comment:


  • adventure
    replied
    I'd pay them off. Today. Yes, there is some potential to play the numbers game, but there is potential value in having cashflow.

    There is also value in simplicity. And your time. Being done with another recurring monthly hassle is worth something too.

    Leave a comment:


  • ENT Doc
    replied
    I would put in taxable at that low rate. 90k in cash seems like a lot. I'd lower that, or re-explore my expenses (assuming that's what the 90k is based on).

    Leave a comment:


  • Zaphod
    replied




    Right now have about 90k in cash and expecting to receive a bonus this year of around 130k, which will net out to 65k after taxes. Wife and I have about 200k for a down payment on a house already. I’m 33 and she is 32. One child who is 19 months old.

    So question is after maxing our 401k and 529, should the remainder of money be put into taxable investment account, keep as cash or pay down/off the debt?

    Thanks for the advice.
    Click to expand...


    Your student loans are essentially paid off already, its just a question of where balances are on the ledger and your long term goals. You're very young and a boost into investments will be long term more beneficial at this time. However, given you have a certain amount of savings built up and all this 'extra' coming in, its again a question of where to hold the balances if any. WCI's suggestion of picking a time frame makes great sense.

    Otoh, you have 200k saved up for a house down payment, and 72k in student loans. This becomes very simple. I'd pay the student loan with your mortgage fund and transfer it to mortgage debt instead which is by any way measured much preferred as a form of debt.

    After you've built up a reasonable emergency fund, I wouldnt hold cash much above that. Open the taxable for that.

    Leave a comment:


  • Thedoc2049
    replied
    Right now have about 90k in cash and expecting to receive a bonus this year of around 130k, which will net out to 65k after taxes. Wife and I have about 200k for a down payment on a house already. I’m 33 and she is 32. One child who is 19 months old.

    So question is after maxing our 401k and 529, should the remainder of money be put into taxable investment account, keep as cash or pay down/off the debt?

    Thanks for the advice.

    Leave a comment:


  • The White Coat Investor
    replied




    Hi,

    I am attending making good income. I have 72,000 student loan debt refinanced at 2.95%. No other debt.

    Question is should I pay off my debt as quickly as possible? Or should I be investing extra income into taxable investment account? 529 for kids?

    I already plan to max out the employer 401k and Roth IRA. Question is what to do with left over income – pay off loans quickly or taxable investment account? My hesitation in paying off the debt quickly is the rate is currently low and may be advantageous to keep this relatively cheap debt around longer.

    Thanks for your advice.
    Click to expand...


    How long do you want to be in debt? If the answer is as short a period of time as possible, then pay off debt instead of investing in taxable. If the answer is 5 years, then figure out what it takes to pay the debt off in five years, pay that toward it, and invest the rest. If the answer is "I love debt and want to maximally leverage it to boost my investing returns" then pay the minimum and invest the rest.

    There really is no wrong answer here, but there probably is a right answer for you. In my experience, doctors really appreciate being done with student loans within 5 years of being out of residency, no matter what the interest rate is.

    Leave a comment:


  • dayman
    replied
    First, make sure you are comfortable with your emergency fund. I'd also contribute to a 529 plan if you get a state tax credit.

    After that, it's a personal decision. It's probably mathematically advantageous to keep the loans at sub-3% and invest in a taxable account instead. Despite that, if I was you I'd just pay off the debt. The psychological benefit of being debt free would be worth it to me.

    Really, both are good options. Either you'll be debt free or you'll have a healthier investment account. I wouldn't lose too much sleep over it regardless of which you choose.

    Leave a comment:


  • Zaphod
    replied
    Whats your age? This is the most important part of the question. When you're at the beginning of your career its more advantageous to invest and start a nest egg as soon as possible to lock in long term compounding. If towards the end of your career thats not as powerful a device.

    Other things that matter are job security, whether you have any plans to move or start your own practice, etc...all things that might sway you towards loan payoff and ability to be nimble.

    Leave a comment:


  • FIREshrink
    replied
    without knowing more details, one cannot responsibly offer you advice.

    Do you have an emergency fund? is your job stable? Are you buying a house anytime soon? Do you already have kids and how old are they? How old are you?

    etc

    Leave a comment:

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