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dysaio posted:Taking compound interest into consideration, does it make sense to max out a Roth IRA each year before paying off debts (school loans, on average 4-5%), or dumping everything into the debts first (3-4 years to get them all paid off)? Personally, I'm contributing enough to max out the company match on 401k and then overpaying what I can on my loans (also at 5-6%) to get rid of them. For now, I don't think you can do much better than a guaranteed 5% return when the S&P 500 is down over 10% for the year.
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Jul 4, 2008 06:54
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Rekinom posted:Here's a question for anyone who's familiar with investing. I currently have a student loan balance of about 9k being repaid at about 4.2%, and I have about 14k in a non-retirement Vanguard mutual fund. Now, the Vanguard fund currently isn't exactly making money hand over fist, but I'm sort of reluctant to take out the money from the fund and pay off the loan balance. If the 4.2% is fixed I'd consider leaving it alone; you can deduct the interest if you don't make too much. Historically, the market should return better than 4.2%. If it's variable, consider paying it off because the interest rate is only going to go up once the feds start raising rates again.
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Aug 3, 2008 18:42
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Crazak P posted:I have $5k that I'm planning using towards my student loan for this year, in addition to the payments I'm making monthly ($375). In about a year, I'll get a 2.25% interest rate reduction. You can deduct your interest so that makes the rate more like 5%, and with next year's deduction the rate will be more like 3%. Is the rate fixed or variable? If the rate is going to be 3% effective next year then the Roth would be a better option. With that much in student loan debt, you won't be making much net profit with your investments since you pay so much in interest. However, the nice thing about having it in investments vs paying off student loans directly is that you still have access to the money should you need it emergently (vs once you use it to pay off loans it is gone).
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Mar 23, 2010 14:41
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There hasn't been a whole lot of compounding going on during the last decade. Like I said when you're paying $1500-2500 a year in interest it doesn't really matter where your $7-12K in invested. Do you want to have access to it? Put it in a Roth and hope you can beat whatever the interest rate on your student loans are - there is some risk there. Do you want a guaranteed return? "Invest" in your students loans - especially if they are at 6+%. Since you are young, and the interest rate is going to drop soon, I'd take the risk and put it into the market. There are some people with student loans at 1.8% fixed and other people with credit card debt at 15%...in those situations it's easy to figure out where to put your money. You are in a bit of a gray area. It sounds like you want to put it into the stock market so go for it.
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Mar 24, 2010 03:53
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coco bryce posted:My main question is: should the tax benefits of investing in a regular 401(k) outweigh the downside of being forced to choose a managed fund with an expense of %0.50-1.00? My alternative would be taxable investment in a standard mix of the Vanguard index funds. Normally employer matching makes up for the high expense ratios, but since you aren't receiving any match maxing out the Roth first makes sense. If you want to save more than $5K year for retirement you could use your 401(k). One benefit to using the 401(k) anyway is that it allows you to drop your AGI. If you are near some threshold (like student loan interest deduction or the like) then it could be worth putting some money into the 401(k).
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Mar 28, 2010 14:21
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edit: read some stuff that answered my question
Realjones fucked around with this message at 23:44 on Feb 22, 2011 |
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Feb 21, 2011 05:26
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KennyG posted:Someone making 250k in the 33% bracket would need only 4.73% to beat their loan on a 30 year horizon with 6.8%. its a long term bet and it's certainly a high risk for reward scenario but its not as cut and dry as evaluating just the interest rates. The student loan interest deduction starts to cut off at 60K/120K, so no one in the 28%+ bracket is going to be able to take the deduction. Basically DINKs and single people (especially in high cost areas) get shafted. I think the best plan for 6.8% loans is to overpay enough to get the payoff period down to 10-15 years and put the rest in the market. This way you are somewhat hedged. This is for people with a lot of loans. If you're paying less than $100 a month in student loan interest the differences in payoff strategies are really negligible. One HUGE thing in paying off vs investing is that the money you invest is always available, whereas money you pay off towards your loan is gone. Your "beat my student loan interest" funds can double as your emergency fund. Should you ever need to just need or want to pay the loan off (say for getting your DTI down to buy a house), you can pull money out and do it. Realjones fucked around with this message at 18:03 on Mar 15, 2011 |
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Mar 15, 2011 17:43
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You're right on the AGI thing so I edited that out so as to not confuse people. There are "back doors" to contribute to a Roth IRA regardless of how much you make: http://highearnersclub.com/roth-ira.html It's way simpler to just up your 401(k) to meet the limits if you don't make too much over the limits, but the loopholes are there.
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Mar 15, 2011 18:06
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Great analysis. The best option is really only dependent on the first couple of years after you graduate. Option A can be a great option if the Dow tanks within the first 5 years. Someone who graduated in 2004/2005 on the five year payoff plan is going to crush whoever went with option D. Likewise, if you graduated in 2009/2010, option C/D (at least so far) has been the way to go. It seems that you agree that slightly overpaying some is better than either of the extremes.
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Mar 16, 2011 02:00
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Dial M for MURDER posted:I'm looking to bump up my ROTH IRA contributions, currently I just have money taken out each month and put into the Vanguard total index and international index. Just a random though here, but I really don't like the international index VGTSX. I have some money in it and it STILL is not worth more than what I paid for it in 2010 and is down over the past year. Meanwhile the total index (VTSMX) is up 15% for the year and 20% over the past year. A 20% difference in return! My vanguard target retirement fund would be doing a lot better too if it wasn't getting dragged down by this dog. Yeah I get the whole long term thing, but even though they are even over like 10 years, the total is still beating the int. by 25% over the past five and 25% is a lot. Is there some other international vanguard fund that doesn't suck?
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Sep 7, 2012 13:50
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flowinprose posted:I think VGTSX (or its ETF) is a fine choice for simplicity of international equity holdings. Totally agree and that's why I put the money in there in the first place. The whole point of diversifying is to limit your risk, right? Yet VGTSX dumped just as hard in 2008 and has returned essentially nothing since mid 2009. Meanwhile VTSMX is up nearly 50% during the same time period. The fund is a great idea for someone looking to diversify, but the returns just aren't there for me to warrant holding it as a single fund anymore (I still have ~30% in the target retirement fund). Of course I could sell it and it could shoot up, but three years of no returns is enough for me.
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Sep 8, 2012 01:31
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